How Blockchain is Changing Small Business

Blockchain is Changing Small Business

Blockchain, blockchain, blockchain….what is the blockchain?

It’s plastered all over billboards, blog posts, and the news. It’s considered the new hotness and it’s poised to potentially change small business but you still aren’t 100% what it is or what it might mean for your business. Well, here’s the deal… 

The Blockchain Explained

The blockchain (adequately named) is a chain of blocks, each block in the chain contains data related to a specific transaction. When a transaction occurs, this information is stored in a block and then added to the chain. These blocks combine to form a distributed database that can scale as more and more transactions occur. Unlike traditional databases, this system creates a single shared ledger.

blockchain for small business

How does the blockchain keep transactions secure?

The blockchain maintains security through approval of its participants. Blocks are distributed amongst users (peer to peer network) and information is protected using private key cryptography. Rather than information being stored in a single location, data is distributed amongst many smaller decentralized networks working together as if one.

Each user has both a private and a public key. The public key is like an address by which other  users can send and receive digital assets; the private key is known (or should) only be known to the individual user. Combined, these keys form a user profile by which they can anonymously interact and create transactions with others online.

Why is Blockchain important?

●     Increased efficiency: A single ledger that’s continuously synchronized throughout a network potentially eliminates the need for reconciliations.

●     Reduced loss and fraud: Blockchain is designed to create and maintain unalterable records. This may help reduce the risk of fraud and show compliance through an audit trail.

●     Improved customer experience: Using blockchain to share information with clients and vendors may allow companies to serve customers more quickly and even find new sales opportunities.

●     Higher availability of capital: Blockchain technology may reduce capital consumption due to quicker settlement of trades, straight-through processing, and freed-up capital flows.

What the Blockchain Means for Small Business

A New Future for CFOs

Blockchain may also have significant impact on financial operations. The KPMG analysts who have been studying the technology anticipate these key trends:

●     Work with existing systems: Blockchain will not replace current CRM (Customer Relationship Management) software offerings overnight. However, it may take time to fully realize the benefits of blockchain's real-time view of data.

●     Go private, then public: Finance organizations may start with private blockchains to retain sensitive data, but could eventually add permissioned blockchains for industry partners and even customers.

●     Mind the regulations gap: It's going to take time for government regulators to understand the technology and its decentralization of financial activities.

Smart Contracts

Smart Contracts are a less talked about blockchain innovation that can help facilitate agreements between businesses directly. Leveraging the power of the blockchain, smart contracts may help eliminate legal fees and create speedier workflow between two entities without the need for a lawyer or intermediary.

Smart contracts aren’t beholden solely to two separate entities. A company can use the technology internally, using it like an operating system that governs different types of transactions. In this sense, a business might be able to better track parts and services, transactions, data flow and other functions.

Some of the small business areas that will likely be affected are:

●     Invoicing

●     Payroll

●     Fulfillment

●     Property Management

●     Lending

●     Construction

●     Legal Matters

●     NDAs 

Evaluating Blockchain for Your Business

Blockchain may have a big impact on core processes: Quote-to-cash, source-to-pay, and acquire-to-retire processes may all be affected.

But blockchain is not the latest new cure-all. It’s important for CFOs and executive leaders to address a number of questions about when and how blockchain implementation makes sense for their businesses, including:

●     What types of transactions are best handled by a blockchain technology?

●     What kind of infrastructure or new equipment will be required?

●     Who will manage a blockchain and new participants?

●     How can blockchain technology improve risk management?

●     What are the regulatory implications?

Industries Likely to be Impacted by Blockchain Technology

smart contracts

Blockchain can cut through that multilayered complexity by establishing a single ledger to track and capture as many of the interconnected web of transactions as makes sense for a given business. For example, consider the possibilities for a shipping company, which has to navigate transactions with:

●     Internal staff

●     Contract staff

●     Manufacturers shipping goods

●     Ports-of-passage requirements

●     Transfer fees and taxes at multiple stops

●     Bills of lading requirements at multiple stops

●     Transnational and international maritime laws and boundaries

●     Insurance requirements across multiple borders

●     Final delivery and confirmation

●     Losses and damages

Let’s take another, simpler example, like a landlord with several properties and a couple of employees. Here are some areas where blockchain technology might help:

●     Fulfilling payroll for employees

●     Rental Agreements between landlord and renter

●     Property leasing agreements for an office

●     Building Contracts

●     Invoicing of tenants 

Examples like these have many challenges that can stall business growth and cause headaches. However, leveraging the power of the blockchain may provide many opportunities to make complex process and workflows run smoother, safer, and more efficiently.

Businesses, developers and consumers are still learning and discovering the potential that blockchain technology holds. It has yet to completely overhaul an industry but the excitement behind it is undeniable, and the technology—potentially revolutionary.

For more insights about blockchain, visit here.

The information contained herein is general in nature and based on authorities that are subject to change. Applicability to specific situations is to be determined through consultation with your tax adviser.

Sources:

https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2018/07/h1-2018-pulse-of-fintech.pdf

https://www.forbes.com/sites/kpmg/2018/09/11/blockchain-and-the-future-of-finance/#7cda4f55620f

https://advisory.kpmg.us/articles/2018/blockchain-future-finance.html?utm_source=forbes&utm_medium=content&mid=m-00002211&utm_content=blockchainfinance&utm_campaign=c-00061241&cid=c-00061241

https://tax.kpmg.us/articles/2018/blockchain-and-future-of-tax.html

Some or all of the services described herein may not be permissible for audit clients and their affiliates or related entities.

The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 

 

 

What Does the Wayfair Sales Tax Ruling Mean for my Business?

wayfair decision

Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.

What does Wayfair mean for Sellers?

In South Dakota v. Wayfair, Inc., the Supreme Court of the United States overturned the physical presence nexus rule for state sales taxes. Without the requirement of a physical presence to establish nexus, it is possible for solely virtual and economic contacts in a state to give the state jurisdiction to require an out-of-state retailer to collect and remit sales and use tax on sales to in-state customers.

The Court did not create another “bright line” test for determining when a retailer has nexus for sales and use tax purposes, but instead noted that the U.S. constitution prohibits states from placing an undue burden on interstate commerce. While the Court did observe that many aspects of the South Dakota nexus law and related factors indicated the law may not create an undue burden on out-of-state seller, it sent the case back to the South Dakota Supreme Court for further deliberations on whether an undue burden existed.  

In recognition of the overturning of the physical presence nexus rule and the requirement that state nexus rules may not overly burden interstate commerce, many states have introduced sales tax nexus thresholds based on factors such as receipts generated from customers in the state and a minimum number of transactions with customers in the state.  Below is a summary of the thresholds in place in a number of those states:

State by State Threshold & Effective Dates

Alabama: $250,000 and one or more nexus-creating activities

Effective Date: October 1, 2018

Connecticut: Regular or systematic solicitation of sales, plus $250,000 and 200 transactions

Effective Date: December 1, 2018 (previous standard in effect until December 1, 2018)

Hawaii: $100,000 or 200 transactions

Effective Date: July 1, 2018

 

Illinois: $100,000 or 200 transactions

Effective Date: October 1, 2018

 

Indiana: $100,000 or 200 transactions

Effective Date: TBD (pending resolution of state litigation regarding economic nexus law)

 

Iowa: $100,000 or 200 transactions

Effective Date: January 1, 2018

 

Kentucky: $100,000 or 200 transactions

Effective Date: October 1, 2018

 

Louisiana: $100,000 or 200 transactions

Effective Date: TBD (when US Supreme Court rules the SD statute constitutional)

 

Maine: $100,000 or 200 transactions

Effective Date: July 1, 2018

 

Maryland (proposed): $100,000 or 200 transactions

Effective Date: October 1, 2018 (pending adoption of emergency regulation)

 

Michigan: $100,000 or 200 transactions

Effective Date: October 1, 2018

 

Minnesota: Regular or systematic solicitation of sales, plus either 100 transactions or 10 or more transactions totaling over $100,000

Effective Date: October 1, 2018

 

Mississippi: $250,000 plus purposeful or systematic exploitation of the MIssissippi market

Effective Date: September 1, 2018

 

Nebraska: $100,000 or 200 transactions + meet “doing business” definition

Effective Date: January 1, 2019

 

Nevada (proposed): $100,000 or 200 transactions

Effective Date: TBD

 

North Carolina: $100,000 or 200 transactions

Effective Date: November 1, 2018

 

North Dakota: $100,000 or 200 transactions

Effective Date: October 1, 2018

 

South Dakota: $100,000 or 200 transactions

Effective Date: TBD (pending resolution of state Wayfair litigation)

 

Tennessee: $500,000 and regular or systematic solicitation

Effective Date: TBD (pending resolution of state litigation regarding state economic nexus rule and approval by General Assembly)

 

Utah: $100,000 or 200 transactions

Effective Date: January 1, 2019

 

Vermont: Regular, systematic, or seasonal solicitation of sales, plus either $100,000 or 200 transactions

Effective Date: July 1, 2018

 

Washington: $100,000 or 200 transactions

Effective Date: October 1, 2018

 

Wisconsin (proposed): TBD (likely $100,000 or 200 transactions)

Effective Date: October 1, 2018

 

Wyoming: $100,000 or 200 transactions

Effective Date: TBD (pending resolution of state litigation regarding economic nexus law)

The tax authorities or officials of various U.S. states have issued statements and guidance or otherwise responded to the U.S. Supreme Court’s decision in “South Dakota v. Wayfair, Inc.”

In Wayfair, the Supreme Court overruled the physical presence nexus standard of Quill and National Bellas Hess for state and local taxation of remote sales.

As soon as the Supreme Court issued its decision in Wayfair (on June 21, 2018), various states began issuing statements or guidance, or introducing bills in response.

wayfair sales tax ruling

The following provides a summary of state actions or responses to Wayfair to date.

State by State Breakdown

Alabama

The Alabama Department of Revenue on July 3, 2018, issued guidance providing that the state’s existing “economic nexus” rule (810-6-2-.90.03), effective January 2016, will be applied prospectively only for sales made on or after October 1, 2018. While this rule technically was effective January 1, 2016, its validity was in question pending the outcome of the Wayfair decision. Because Wayfair removed the constitutional impediments to the rule, it will be enforced going forward.

Remote sellers with annual Alabama sales in excess of the rule’s $250,000 small-seller exception need to register for the Alabama Simplified Sellers Use Tax (SSUT) program and begin collecting tax no later than October 1, 2018. The SSUT program requires a participating seller to collect a tax of 8% on all sales into the state and to remit all such collections to the Department of Revenue (rather than collecting and remitting in individual localities).

In addition to the collection requirements for remote sellers, Alabama law requires marketplace facilitators with Alabama marketplace sales in excess of $250,000 to collect tax on sales made by or on behalf of its third-party sellers or to comply with use tax reporting and customer notification requirements. Marketplace facilitators must start collecting or complying with the reporting requirements on or before January 1, 2019. The marketplace facilitator can choose to begin collecting under the SSUT beginning in October 2018, and if a remote seller can demonstrate that a marketplace facilitator is collecting and remitting on its behalf, the seller is relieved of the collection obligation.

Arkansas

A legislative tax reform task force recommended to the legislature that remote sellers with more than $100,000 in sales or at least 200 separate transactions in Arkansas be required to collect and remit Arkansas sales and use tax. It was not recommended that the requirement be retroactive.

Colorado

A spokesperson for the Colorado Department of Revenue, in a statement to the tax press, said “whatever we [Colorado Department of Revenue] do for Wayfair will have no impact on our noncollecting reporting requirements.” The spokesperson further noted, “If Colorado should do as most other states have done and require most remote sellers to collect and remit sales taxes,” the reporting law “will still be in effect for any vendors that choose not to collect sales taxes.”

Hawaii

The Hawaii Department of Taxation on June 27, 2018, announced how it plans to implement the state’s recently enacted “general excise tax” (GET) economic nexus provisions. This law was initially reported to apply to tax years beginning after December 31, 2017.

The Department of Taxation subsequently announced that it would not enforce the state’s economic nexus provisions retroactively to all tax years beginning after December 31, 2017, to avoid any constitutional concerns. Thus, taxpayers that lacked physical presence in Hawaii before July 1, 2018, but that met the $100,000 or 200-transaction threshold in 2017 or 2018, will not be required to remit general excise tax for the period from January 1, 2018, to June 30, 2018. However, taxpayers that meet these standards will be subject to general excise tax beginning on July 1, 2018 (or on the first day of the tax year beginning on or after July 1, 2018 if the taxpayer is a fiscal year taxpayer) and must file their first periodic returns by the statutory deadline for that period.

Idaho

The Idaho Tax Commission on June 28, 2018, issued a release stating that it was “...still studying how the decision affects out-of-state retailers, such as online sellers, that make sales to Idaho citizens" and that it is "closely watching any actions by the U.S. Congress on this issue.”

The Tax Commission also stated that it will implement a new law (House Bill 578) that requires out-of-state retailers to collect Idaho sales tax on their sales to Idaho customers when: (1) the out-of-state seller has an agreement with an Idaho retailer to refer potential buyers to the out-of-state seller for a commission; and (2) the total sales to the Idaho buyers exceeded $10,000 in the previous year. The effective date for the law is July 1, 2018. Any out-of-state retailer that is required or wants to collect the state sales tax for its Idaho customers can register online.

Indiana

The Indiana Department of Revenue announced that remote sellers are not obligated to register or collect Indiana sales tax until a declaratory judgment action is resolved (that is, while the Department is currently prohibited from enforcing the obligation to collect sales tax from remote sellers until the pending declaratory judgment action is resolved). The Indiana economic nexus law is substantially similar to South Dakota’s law.

In a “frequently asked questions” (FAQs) document (dated July 9, 2018 on the state website), the Department stated it will not seek retroactive enforcement of its economic nexus statute and has targeted October 1, 2018 as the enforcement date of Indiana’s economic nexus law in Indiana Code 6-2.5-2-1(c) (pending resolution of the declaratory judgment).

Under the FAQs, the Department of Revenue stated:

Indiana’s Department of Revenue is currently prohibited from enforcing the obligation to collect sales tax from remote sellers until a declaratory judgment action currently pending in Indiana is resolved. Moreover, remote sellers are not obligated to register or collect Indiana sales tax until the declaratory judgment is resolved.

Pending resolution of the declaratory judgment action, DoR will begin enforcing Indiana’s economic nexus law on October 1, 2018.

Iowa

The Iowa Department of Revenue posted a statement on its website simply confirming that the state’s recently enacted economic provisions (substantially similar to those of South Dakota) are effective January 1, 2019.

The Iowa Department of Revenue noted that “the Wayfair ruling does not change the effective date of Senate File (SF) 2417 and the Iowa Department of Revenue will not seek to impose sales tax liability for periods prior to January 1, 2019 for retailers whose only obligation to collect Iowa sales tax comes from these new laws.”

If a retailer should have collected Iowa sales tax under the traditional physical presence rule of Quill Corp. v. North Dakota and Iowa law that existed prior to SF 2417, those retailers are encouraged to participate in Iowa’s voluntary disclosure program.

Kentucky

The Kentucky Department of Revenue, on June 27, 2018, issued a statement noting remote sellers that meet the threshold transaction or receipt thresholds ($100,000 of gross receipts from Kentucky sales of tangible personal property or digital property or 200 or more separate transactions for delivery into Kentucky) need to prepare to begin the registration process for collection of Kentucky sales and use tax on a prospective basis.

Louisiana

Louisiana’s Department of Revenue reportedly has targeted January 1, 2019, for an update to its processing systems that would allow the Louisiana Sales and Use Tax Commission for Remote Sellers (created under Louisiana House Bill 17) to serve as the single collector of state and local sales and use tax for remote sellers, according to Louisiana’s Secretary of Revenue. The Department will be issuing further guidance from the commission on next steps for remote dealers to comply with Louisiana law going forward. In addition, the Louisiana Sales and Use Tax Commission for Remote Sellers will be discussing how to become compliant with the Streamlined Sales and Use Tax Agreement without adopting the agreement and whether legislation is needed.

Initially (soon after the decision in Wayfair), the Department of Revenue issued a statement noting that Louisiana’s nexus provisions are similar to those in South Dakota—that is, a threshold of $100,000 of Louisiana sales or 200 or more separate transactions for delivery into Louisiana.  In its statement on June 21, 2018, the Department of Revenue noted that because the U.S. Supreme Court remanded Wayfair, it will be some time before there is a final decision and the full impact of the decision is known.

Under current law, Louisiana’s sales and use tax collection requirements apply to all tax periods beginning on or after the date of a U.S. Supreme Court’s decision in Wayfair concluding that South Dakota’s economic nexus rules are constitutional.

Maryland

The Comptroller issued a tax alert (July 2018) explaining that taxpayers need to review the Supreme Court’s decision in Wayfair to identify how it affects them. The Comptroller, while indicating additional guidance will be provided, explained Maryland imposes a sales tax collection requirement as broadly as is permitted under the U.S. Constitution.

The state’s website indicates that the information provided under  “Nexus Information for Sales and Use Tax” is “under review in light of the United States Supreme Court decision in South Dakota v. Wayfair, Inc."

Massachusetts

The Massachusetts Department of Revenue on June 22, 2018, issued a statement that the existing regulation as applicable to vendors making sales via the internet “continues to apply and is not impacted by the Supreme Court's decision.”

Under the regulation, remote sellers that (1) have the requisite “in-state physical presence” (generally defined with references to having “apps” and “cookies” in Massachusetts or having relationships with in-state content distribution networks, and (2) meet a specific sales threshold of more than $500,000 in Massachusetts sales from transactions completed over the internet and delivery into Massachusetts of 100 or more transactions, are required to collect and remit Massachusetts sales and use tax.

Minnesota

The Department of Revenue issued a release indicating it plans on July 25, 2018, to announce the date by which it will require remote sellers and marketplace providers to collect and remit applicable sales or use tax on sales delivered into the state. In 2017, Minnesota passed legislation requiring remote sellers and marketplaces meeting certain thresholds to collect tax on sales into the state, with the statute becoming effective the earlier of an overturn of Quill by the U.S. Supreme Court or January 1, 2019.

Mississippi

The Mississippi Department of Revenue on June 21, 2018, issued a statement that:

The effect of the U. S. Supreme Court’s decision is that all out-of-state sellers who lack physical presence in [Mississippi] must now collect tax on sales to [Mississippi] residents. Mississippi requires any out-of-state seller lacking physical presence and who has sales greater than $250,000 for the prior 12-month period must register and collect the tax from its [Mississippi] customers.

Montana

The Montana Department of Revenue issued a statement noting the Wayfair decision generally will not affect sales to customers in Montana because the state does not impose a general sales or use tax. However, Montana remote sellers making sales into other states may be required to collect and remit depending on the respective state’s laws.

Nevada

The Nevada Tax Commission will hold a public hearing on Thursday, September 13, 2018 to receive comments on the state’s adoption of a regulation requiring remote sellers to collect and remit Nevada sales and use tax. The regulation proposes to adopt economic nexus for sales and use tax purposes with thresholds that mimic South Dakota's law (more than $100,000 in sales or 200 or more separate transactions for delivery into the state). Under the proposed regulation [PDF 145 KB], the retailer must register with the Department of Taxation no later than the first day of the first calendar month that begins 30 calendar days after the retailer meets the economic nexus threshold.

New Hampshire

A joint legislative task force has assembled draft legislation to be introduced in a July 25, 2018 special session. Although New Hampshire does not impose sales or use taxes, the legislation would impede other states from imposing a sales and use tax collection obligation on New Hampshire remote sellers.

The legislation would prohibit foreign taxing jurisdictions, as defined, from requesting information from, conducting examinations of, or imposing sales and use tax collection obligations on sellers in New Hampshire, unless the foreign taxing jurisdiction registers and provides notice to the New Hampshire attorney general. Before allowing such an examination to go forward, the attorney general of New Hampshire would be required to determine that the laws of the foreign jurisdiction meet the requirements of the U.S. and New Hampshire constitutions—including a safe harbor for small sellers; a prohibition against retroactive application of any collection requirement; and membership in Streamlined Sales and Use Tax Agreement (SSUTA) or substantial compliance with the individual provisions of the SSUTA. The legislation would also prohibit sellers in New Hampshire from providing private customer information to any foreign taxing authority for purposes of determining liability for collection of certain sales or use taxes unless the seller has provided a written notice of the request for such information to the attorney general. The legislation would, however, allow sellers to comply with any directive of a foreign taxing authority, while preserving the seller’s rights under the statute, if the seller determines that such compliance is in the seller’s best interest.

New Jersey

In each house of the New Jersey legislature, bills were introduced to adopt an economic nexus law identical to that under South Dakota law. The collection obligation would begin the first day of a calendar quarter 90 days following enactment. Assembly bill (AB 4261) and the companion Senate bill (SB 2794) were passed by the legislature, but the legislation has not yet been signed by the governor.

North Dakota

The Office of State Tax Commissioner created a webpage explaining the sales and use tax collection laws applicable in North Dakota.

If you do not meet the Small Seller Exception ...and you are not already registered and collecting North Dakota sales tax, you will need to be registered and begin collecting the tax in North Dakota on October 1, 2018, or 60 days after you meet the Small Seller Exception threshold, whichever is later.

North Dakota’s law is similar to South Dakota’s law, requiring remote sellers to collect North Dakota sales and use tax if the seller’s sales into the state exceed $100,000 or if the seller has 200 or more sales shipped to North Dakota.

The new webpage provides resources for taxpayers to register and apply for a North Dakota sales and use tax permit. The North Dakota tax commissioner announced that over the next few weeks, the tax office “will be working to implement this new law change.” The website indicates that it is a “work in progress” with information to be added as it is available.

Ohio

A Department of Taxation representative reportedly stated that the Wayfair decision did not have an immediate, direct impact on Ohio because the Supreme Court examined the law of South Dakota, rather than Ohio’s. 

Under Ohio law, an out-of-state vendor that uses in state software to make sales or that has relationships with a content-distribution networks in Ohio and has gross receipts in excess of $500,000 from sales of tangible personal property to Ohio customers is deemed to have nexus.

Rhode Island

Rhode Island’s Division of Taxation created a webpage to provide information for non-collecting retailers, referrers, and retail sales facilitators. In “frequently asked questions" (FAQs) revised July 20, 2018, the state confirmed that taxpayers still have the option to comply with the state’s use tax notice and reporting requirements instead of registering to collect and remit sales and use taxes following Wayfair.

Under a Rhode Island law enacted in 2017, any non-collecting retailer that has in the immediately preceding calendar year (1) over $100,000 of taxable sales of tangible personal property, prewritten computer software, or taxable services delivered into Rhode Island, or (2) over 200 of such sales transactions must comply with certain use tax reporting requirements or register to collect and remit sales and use tax.

South Carolina

The South Carolina Department of Revenue issued a draft revenue ruling that addresses nexus with localities. The Department of Revenue explained, effective October 1, 2018:

It is the Department’s position that once a retailer has established nexus with South Carolina for sales and use tax purposes, the retailer has nexus for sales and use tax purposes with every local jurisdiction in the state for which the Department administers and collects a local sales and use tax. As such, the retailer must remit local sales and use taxes for any local jurisdiction into which deliveries are made by, or on behalf of, the retailer.

The Department of Revenue created an extensive question and answer (Q&A) list to assist remote sellers. Public comments are due September 4, 2018.

South Dakota

The South Dakota governor has been meeting with legislators and state revenue officials to discuss legislation to be considered at a special legislative session the governor has called. According to the governor’s spokesperson, the proposed legislation is expected to be made available to the public next week.

Two proposals are likely to: (1) remove the injunction put in place by the state circuit court in Wayfair and (2) require marketplaces to collect and remit sales and use tax on sales made by marketplace sellers.

Tennessee

The Tennessee Department of Revenue issued a notice that reiterates that it is currently prohibited from enforcing the state's economic nexus rule (Rule 129(2)). The Department of Revenue makes clear that dealers (remote sellers) with no physical presence in Tennessee are not currently required to collect and remit Tennessee sales and use tax until the Department of Revenue issues a public notice specifying an enforcement date and under which circumstances dealers must collect and remit the tax. Rule 129(2) will not be applied retroactively.

Texas

The Texas Comptroller's Office met with its business advisory group and tax advisory group to discuss the state's approach in requiring remote sellers to collect and remit Texas sales and use tax. The Comptroller is considering amending the definition of “engaged in business” in Rule § 3.286(a)(4) and to adopt a safe harbor (e.g., a small seller exception). It is not yet known whether the safe harbor would contain both a dollar and transaction threshold. 

The current planned schedule for adopting and implementing the amended rule calls for distribution of a draft rule in September 2018 and submission of a final proposed rule in October. The current plan calls for the rule to become effective on January 1, 2019 with enforcement to begin in either July or October of 2019.

During the meeting, it was clarified that legislation is needed to require marketplace providers to collect and remit sales and use tax. There was also discussion of the possibility of amending current law (Tex. Tax Code § 151.059) so as to allow remote sellers to collect a fee equal to the weighted average local tax rate in lieu of the actual local tax due on each sale.

Utah

Senate Bill 2001 was approved by lawmakers in a second special session. The bill was sent to the governor for signature on July 19, 2018.

Once enacted, this bill would impose a sales and use tax collection and remittance obligation on remote sellers (1) receiving gross revenue of more than $100,000 from the sale of tangible personal property, any product transferred electronically, or services for storage, use, or consumption in Utah; or (2) has 200 or more separate transactions from such sales. The provision establishing the new thresholds for a collection and remittance obligation would be effective January 1, 2019.

Part of the expected revenue from the change will be used to expand the scope of certain aspects of the state’s manufacturing machinery and equipment exemption.

Vermont

The Vermont Department of Taxes issued a statement explaining that remote sellers meeting the state’s economic nexus thresholds of sales of at least $100,000 or 200 individual transactions during any preceding 12-month period are required to register to collect and remit sales tax beginning July 1, 2018.

Washington

The Washington Department of Revenue noted on its webpage that it is examining the decision in Wayfair and implications for businesses and taxpayers. As a reminder, the state noted that, beginning January 1, 2018, remote sellers making $10,000 or more in retail sales to Washington purchasers must either: (1) collect and remit sales and use tax on sales to Washington purchasers, or (2) follow the state's use tax notice and reporting requirements.

West Virginia

The governor on June 21, 2018, issued a press release following the Supreme Court’s decision:

When I took office and our state was struggling financially, at that desperate time, I might have considered supporting legislation to enforce West Virginia sales tax on out-of-state transactions. However, now I do not support adding additional taxes on our people in this manner. This is an issue for the Legislature, and legislation would have to be passed to authorize the state to enforce the collection of out-of-state sales taxes. With our state’s growing economy, I don’t want to reach into West Virginians' pockets when we don’t need to.

Wisconsin

In a July 2, 2018 memo sent to the Wisconsin legislature, the Wisconsin Legislative Fiscal Bureau stated that the statutory definition of a retailer effectively has been modified by the Wayfair decision because the physical presence standard is no longer constitutionally required.

Wisconsin defines "retailer engaged in business in this state" to include "any retailer selling tangible personal property, or items, property, or goods...or taxable services for storage, use, or other consumption in this state, unless otherwise limited by federal law." The memo notes, however, that unlike South Dakota, the Wisconsin statutes do not specifically provide for “an electronic nexus threshold," and it is unclear that requiring out-of-state vendors to collect tax without changes to statutes or administrative code would comport with the Supreme Court’s decision.

The Wisconsin Department of Revenue subsequently on July 5, 2018, issued guidance stating that beginning October 1, 2018, remote sellers will be required to collect and remit sales or use tax on sales of taxable products and services in Wisconsin. The Department of Revenue is developing a rule consistent with the Court’s decision in Wayfair for small-seller exceptions and other matters.

Wyoming

The Wyoming Department of Revenue reportedly stated that it is targeting October 1, 2018, as the enforcement date for remote sellers to be licensed to collect and remit sales and use tax.

Other states

Tax agencies or government representatives of other states including California, Florida, Nebraska, New York, South Carolina, and Tennessee—in general statements or in response to specific requests for statements from the tax press—have acknowledged the Wayfair decision and have noted that they are reviewing the decision to ascertain the implications for their respective states.

Wayfair Implications for Foreign Sellers

Wayfair did not distinguish between foreign and domestic sellers. This means that unless a state creates legislation that says otherwise, economic nexus standards will likely apply to foreign sellers. If a foreign seller has no presence in the state, this may complicate things and invite further clarification.

Sources:

More States Respond or Update Initial Reactions to “Wayfair” Decision

KPMG Report: Compilation of State Responses to “Wayfair”

More States Indicate Responses to Wayfair

TaxNews Flash

More States Respond or Update Initial Reactions to “Wayfair” Decision

The information contained herein is general in nature and based on authorities that are subject to change. Applicability to specific situations is to be determined through consultation with your tax adviser. Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.


 

Why Your Small Business Needs an EIN (Even if you Don't Plan to Hire)

Does my business need an EIN number?

When it comes to an employer identification number, commonly referred to as an EIN, entrepreneurs often make the mistake of believing it is only necessary to have this ID when you want to hire employees. What if your business does not have plans to hire team members? Does your small business still need an EIN? The short answer is yes — here’s a look at the additional benefits that this federal tax ID number can provide your startup.

An EIN is less sensitive than a Social Security Number (but should still be protected).

Can you really use an EIN instead of an SSN on paperwork associated with your business? Absolutely. Legally, you are required to identify the entity of your business with either your SSN or EIN for government forms and documents. An EIN is a federal identification number issued by the IRS that identifies your business entity.

EINs are used as federal identifiers, which may help to safeguard against having your personal identity stolen. If you’d rather use precaution when it comes to your business, file for and use an EIN.

While an EIN has a reputation for being slightly less sensitive than your social security number, an EIN is still susceptible to identify theft. Both your social security number and employer identification number work to protect personal information, so take care to protect both numbers equally.

It’s difficult to get around running an incorporated business without an EIN.

There are certain documents that entrepreneurs may think they can wait to file. An EIN is not one of them. When a business has been incorporated, it becomes its own separate entity. You, the business owner, may technically be an employee of the company. The IRS will require your EIN in order to make sure the business collects payroll tax and stays in compliance.

Even if you are organized as a partnership, you must also file for an EIN. Partnerships mean there are two people or more involved with the business and they can’t use both of their social security numbers to identify the company.  

Where else can I use an EIN? 

Good question. Once an EIN has been issued, it never expires which allows small business owners to use it in the additional areas: 

  • If you plan to open a business bank account and establish credit. This is applicable to a wide variety of legal structures including sole proprietorships, general partnerships, limited liability companies (LLCs), and S Corporations.

  • If you decide to change your organization type.

  • For filing annual tax returns.

  • For establishing pension, profit sharing, or retirement plans.

While I highly advocate in favor of filing for an EIN, I also know the rules of the road differ for every kind of business. Before you file any paperwork, it is in your best interest to consult an attorney or accountant for assistance and to ask them any questions you may have about the process.

 

Deborah Sweeney is the CEO of MyCorporation.com which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, EINs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation.

 

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP. Please note that Bookly’s sponsorship of this blog article not intended to address the specific circumstances of any particular individual or entity and does not constitute an endorsement of any entity or its products or services.

The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

KPMG LLP does not provide legal services.

Understanding the Business Meals Deduction (2018)

meals and entertainment deduction

Rarely would one call the world of tax deductions newsworthy but as far as buzz goes, 2018 has actually been a pretty eventful year. In this article we’ll cover the changes that have occurred to the business meals and entertainment deduction as well as, how to get the most of your deductions.

How Meal and Entertainment Deductions Work

Traditionally, meals and entertainment fall into one of three categories:

-       0%

-       50% (most common)

-       100%

Prior to 2018, meals and entertainment deductions were commonly taken at 50% of the expense. This means if a company had 10K in meals and entertainment expenses, it would often deduct a flat 5K. Now that we’re full steam ahead into 2018, this method is no longer advisable.

Meals and Entertainment Deduction: Tax Reform

entertainment deduction

As of 2018, many entertainment expenses are no longer deductible. Easy, now you just write off 50% of the food expense and not entertainment, right? Not so fast, things can get a bit more complicated.

Here are a few examples:

Example A (Prior to 2018)

Businessman Bob takes Prospect Pam to a baseball game to discuss business. Bob buys Pam a hotdog and a drink as well as the tickets. Afterwards he deducts 50% of  the cost of both the tickets and food.

Example B (2018)

Businessman Bob takes Prospect Pam to a baseball game to discuss business. Bob buys Pam a hot dog and a drink as well as the tickets. Knowing he can no longer deduct entertainment costs, Bob begins to write off the hot dogs and drinks.

Businessman Bob is all good here…..right?

According to the 2018 changes, this may no longer qualify as a deductible business meal. Had he taken Prospect Pam to a restaurant beforehand to eat and discuss business and THEN gone to the game afterwards, he likely would have been able to claim the deduction. But because he and Pam ate their meals in front of entertainment, it’s likely he can no longer take the meal deduction because it’s commingled with the entertainment.

The Takeaway

Business Meals Deduction 2018

If the above example has illustrated anything, it’s that it would be a good idea to read as much as you can about the H.R. 1 (previously known as the Tax Cuts and Jobs Act). That, or hire a professional accounting team.

Other Notable Changes:

○ The IRS is no longer allowing 100% deduction under the de minimis meal exception.

○ Previously 100% deductible, currently 50% deductible, with many employer-provided meals non-deductible beginning 2026.

○ Exception “For the convenience of the employer” no longer allowed. This means for example offices that have built-in kitchens and cafeterias where employees can grab free grub are no longer deductible the same way they were previous to 2018.  One of their few ways this may still be deductible is if the employer applies the food charges to the employee’s Form W2 as wages.

How to get the Most of out Your Business Meals Deductions in 2018

Business owners may be able to take 20% in deductions by looking at individual transactions and receipts or by taking a Stat Sample (a small sampling of receipts which you then extrapolate to the overall amount.)

What does this all mean? It means you need to stay on top of all your transactions by carefully organizing your receipts and transactions or by using a reliable online bookkeeping service like Bookly, that automates this process for you.

Not only will this help you single out transactions that are 100% deductible, it will also help manage exposure with the IRS. This has never been more true with the new changes to the Business Meals and Entertainment Deductions, which states that entertainment is no longer deductible.

The information contained herein is general in nature and based on authorities that are subject to change. Applicability to specific situations is to be determined through consultation with your tax adviser.

Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates.

The Pros and Cons of Acting As Your Own Registered Agent

can i be my own registered agent

Most entrepreneurs know that when you incorporate your small business, whether your entity is an LLC, Corporation, or C Corporation, you’re going to need a registered agent. An RA serves as your point of contact between the business and the state, accepting official documents on behalf of the business and helping the company remain in compliance with state law. Your RA can be a third party service, or you may act as your own registered agent

While many small business owners work alongside an organization, some decide that they want to be their own RA — and that’s legally acceptable. Remember that with great power comes great responsibility, on top of all of your other existing entrepreneurial duties. If you’re planning to act as your own registered agent, keep the following pros and cons in mind before getting started.

Pro… It’s less expensive to designate yourself as an RA.

While we can’t quote you an exact price range, acting as your own RA is going to be much less expensive than paying an outside organization for assistance. If you’re on a tight budget, you might consider acting as your own RA for a bit.

Con… You’ll need to be available during general business hours.

Think Monday through Friday during general hours of operation, like 8 AM to 5 PM. Not only will you need to be available to accept service of process during these hours, but you will also need to be a resident of the state and present at your designated physical address. (Another requirement for registered agents since P.O. Boxes are not considered to be an acceptable form of address.) 

While much of this will depend on the entrepreneur’s circumstances and nature of their small business, I placed availability in the ‘con’ section simply for those ‘what if?’ moments. Even if you work from home, you may find there are days where you need to leave to take a meeting offsite or head on a business trip. If you’re not physically there during the hours you said you would be to accept the documents, it could spell trouble for your business.

Pro/Con… You’ll need to be extremely organized.

Some of the legal documents you may receive as an RA include, but are not limited to, general paperwork like annual reports, franchise tax forms, and renewal reminders. 

If you are naturally organized when it comes to paperwork and time-sensitive materials, then you’re likely to stay on top of everything as an RA. However, if you struggle with organization and worry important documents could slip through the cracks, you might want to designate a third party RA. They will be able to keep your paperwork organized and passed along to you in a timely manner so your business doesn’t fall out of good standing with the state.

Pro/Con… You’re comfortable receiving confidential paperwork publicly.

Every entrepreneur is different. Some aren’t phased at the thought of being served confidential legal notices, like a court summons or lawsuit paperwork, in public. Others might be extremely embarrassed and worried that the act could damage their reputation. If you fall into the latter category, working with a registered agent service provides an added layer of security. They will accept the documents on your behalf, so that no unwanted visitors show up at your designated address, giving you and your business some privacy and peace of mind.

 

Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Twitter @mycorporation.

Please note that Bookly’s sponsorship of this blog article is not intended to address the specific circumstances of any particular individual or entity and does not constitute an endorsement of any entity or its products or services. This content represents the views and opinions of the author, and does not necessarily represent the views or professional advice of Bookly or KPMG LLP.

 

 

Everything Entrepreneurs Need to Know About a 'Cooperative Business Model'

cooperative business model

If you run a retail, agricultural, or healthcare-related small business, you might already be familiar with the cooperative business model.

For entrepreneurs just getting started in these industries, a cooperative (sometimes referred to as a “co-op”) is an organization run by an elected board of directors that is operated to benefit those that use its services. Members of a cooperative vote to control the direction the organization goes in and whatever profits and earnings a cooperative generates are distributed among its members.

Much like forming an LLC or Corporation, a cooperative business model faces many similar requirements during the filing process. However, there are also many differences due to the nature of the entity and the role its members play. Here’s a look at the similarities and differences shared in forming a cooperative.

Similar to an LLC or Corporation, a cooperative needs…

· Articles of Incorporation, which are also known as Articles of Organization. These documents are required by the state your business is filed in and includes information like the cooperative’s name, location, dates in business, purpose, and structure.

· Bylaws, which are internal documents necessary to operate the cooperative.  Some of the topics covered in bylaws include how members are elected, how meetings and operational procedures are organized, a summary of duties, and requirements for membership.

· Licenses and permits, which will vary depending on the state you’re in.

Unlike an LLC or Corporation, a cooperative needs…

· A strategy. Members meet together beforehand to discuss needs the cooperative will fill and all aspects of the business plan. Every member must mutually agree upon these decisions together before proceeding forward.

· Membership applications. Want to bring on new members for your cooperative? A membership application must be established ahead of time with necessary information including the names of members, their rights and benefits, and signatures from the board of directors.

· A charter member meeting. The board of directors is appointed during this meeting along with discussion and voting to adopt bylaws created earlier.

Due to its niche nature, a cooperative may not be an option every entrepreneur can embrace for their business. It also faces the difficulties of appealing to investors that seek a financial return with a slower cash flow and “one member-one vote” philosophy which applies to all members regardless of how much involvement or investment they put into the cooperative.

However, a cooperative business model still has plenty of advantages to offer if you feel like it might be the best fit for your needs. The structure operates on a democracy with every member getting the right to their vote and no one vote outweighing another. It’s also inexpensive to register with members taxed only once on their income from the cooperative, and members are free to join or leave with the entity needing to file for a dissolution as a result.

 

Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Google+ and on Twitter @mycorporation.

Please note that Bookly’s sponsorship of this blog article is not intended to address the specific circumstances of any particular individual or entity and does not constitute an endorsement of any entity or its products or services. This content represents the views of the author, and does not necessarily represent the views or professional advice of Bookly.

LLC vs Inc: Advantages + Disadvantages

llc vs incorporated

By Austin Miller, Content Marketing Manager

If you are setting up a business then one of the most important decisions you will need to make is the company structure you choose for that business. Two of the most popular business structures are corporations (also known as Inc., which is short for incorporated) and limited liability companies (LLC).

While both of these business structures offer limited liability that will protect your personal assets in case of a lawsuit against the company, they are unique from one another in terms of management, structure, and taxation. Understanding the advantages and disadvantages of each company structure will give you a better idea of which one is right for your business.

LLC vs Inc: Taxation

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For many people, taxation will be the main driver behind whether they choose to establish their company as a corporation or an LLC. If you choose to form your business as an LLC then you will be subject to "pass-through" taxation. What this means is that the business itself will not pay taxes. Rather, those taxes are paid by the individual members of the LLC and the losses and expenses that the business generates will be reported on individual tax returns.

Corporations can be quite different depending on the type of corporation your business is. An S corporation is, like an LLC, a "pass-through" tax entity, so the corporation itself is not taxed and individuals can use business expenses as deductions on their personal tax returns. A C corporation, on the other hand, is a separate entity and is taxed separately from its shareholders, members, and directors. Corporate income splitting can also result in lower overall tax obligations for a C corporation. However, shareholders may also have to pay taxes on any dividends that are paid out to them by the corporation, leading to "double taxation."

LLC vs Inc: Structure

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Aside from S corporations, which are limited in size and may be profitably used by self-employed individuals, corporations are generally suitable for large entities. Corporations are owned by the shareholders of that company and are operated by the officers. Officers are appointed by the board of directors and the board of directors are, in turn, elected by the shareholders. Because of the complex structure of a corporation and the fact that the directors and officers are accountable to the shareholders, there tends to be limited flexibility in how much control one individual can exert over the corporation. Furthermore, corporations are required to record minutes and hold annual meetings.

An LLC, on the other hand, is often a more appropriate structure for a smaller business entity. An LLC has members instead of shareholders. Members exert a great deal of control over the day-to-day operations of the company. Members may also appoint managers to limited terms who carry out various duties in maintaining and administering the affairs of the business. While members do enjoy greater flexibility in how they operate the company, LLCs cannot issue stock, which may make raising capital more difficult.

LLC vs Inc: Formation

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Forming an LLC is generally easy and does not require a burdensome amount of paperwork. While requirements differ from one state to the next, in most states LLCs require a document called either the "rules of organization" or the "articles of organization." Some states may also require an "operating agreement," which stipulates how the company's income, management, membership, and general operations are to be structured.

Forming a corporation is more complicated and certainly more expensive than forming an LLC. A registration fee, which can run into the thousands of dollars in some states, will have to be paid. Additionally, the Articles of Incorporation will have to be filed and this document will lay out such vital information as where the corporation is located, what business activities it is engaged in, and how many stocks (and of what type) it will be issuing.

A corporation will also need a name that is distinctive and which also describes the main activities of the corporation. In some states, the name will have to include "Inc." at the end to distinguish it from other business structures.

Final Thoughts

Setting up a new business or changing the structure of an existing business presents many unique and exciting opportunities in terms of your company's structure. Incorporation and LLCs offer similar benefits in terms of liability, but they differ substantially in terms of taxation, structure, and formation. It is crucial that you understand these differences as they could be the elements that determine the success and profitability of your business moving forward.

Other Articles You May Find Helpful:

What is Required to Setup an LLC?

How does an LLC Work?

LLC vs. S Corporation

PLLC vs. LLC: Which Entity Should You Incorporate as?

Do I need a Resident Agent for my LLC?

PLLC vs. LLC: Which Entity Should You Incorporate as?

PLLC vs. LLC

This title looks like a typo at first glance, doesn’t it? Entrepreneurs tend to be more familiar with the ins and outs of Corporations and LLCs, the two most common business formations, than they are with PCs and PLLCs. However, depending on what your profession is, a Professional Corporation or Professional Limited Liability Company might just be a better fit for how you do business. Let’s take a closer look at PLLC vs. LLC's.

Professional Corporation (PC)

Corporations have always erred on the more formal side than LLCs, which tend to be flexible. They still allow you to keep your personal assets separate from the business while providing a structure that enables your business to accept money from investors. And believe it or not, your career may be the deciding factor as to whether or not you should form a Professional Corporation. PCs are legal structures authorized by state law for selected licensed professions including doctors, accountants, architects, and lawyers.

Unlike a regular corporation, PCs do not absolve a professional for personal liability for their own negligence. The entity also doesn’t provide the same kinds of personal liability protection that an LLC or S-Corp would. However, if an associate files a malpractice claim against you, the PC steps in to protect owners. But many states require professionals to form this entity if they decide to incorporate — which we recommend doing since so many of these professions need a foundation in place that aids to, and protects, your practice.

Professional Limited Liability Company (PLLC)

To briefly recap what an LLC does, a Limited Liability Company keeps your professional and personal assets separated. It also provides liability protection in the event of unforeseen circumstances which could be anything from a lawsuit to on-site injury.

A Professional Limited Liability Company is quite similar to an LLC in that it is organized for the purpose of providing professional services for professions where a license is required to provide services. Some of these may include the aforementioned PC professions — lawyers, doctors, and architects. These legal structures are authorized by some states to limit personal liability for claims related to a co-partner's negligence or misconduct, ensuring that one partner is not liable for the entirety of these claims.

If you work out of a state where a license is required to provide services, you’ll want to form a PLLC. However, keep in mind that not every state provides PLLC legislation, so check in with yours first to see if they do.

 

Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Google+ and on Twitter @mycorporation.

Please note that Bookly’s sponsorship of this blog article is not intended to address the specific circumstances of any particular individual or entity and does not constitute an endorsement of any entity or its products or services. This content represents the views of the author, and does not necessarily represent the views or professional advice of Bookly.

What is a Virtual Accountant & Should my Business Have one?

Virtual Accountant

By Austin Miller, Content Marketing Manager

The Term Virtual Accountant might sound like something plucked from a George Orwell novel, but that couldn't be farther from the truth. They are very present, very real, and perhaps most importantlythey are very human.

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What is a Virtual Accountant?

Thankfully, having a virtual accountant is not like having a nerdier version Siri, it's a cocktail of remote accountants working in sync with technology to bring you a seamless experience that doesn't require you do to any work. 

How it Works

Now each virtual accounting company might do things differently, but based off our own online bookkeeping service—the sign up process should be relatively easy. We'll use our sign up model to give you an idea of how it works:

Step 1: Sync Your Account

The first step in the onboarding process is to sync your bank account to the software so that your transactions automatically get imported into the software. Our accountants get read-only access, meaning they can't actually touch your money, but they can categorize the transactions (thus, bookkeeping). Our software syncs with hundreds of thousands of institutions, so likely there won't be any problems.

Step 2: Customize Your Preferences

Once you get your account synced up, you'll get a demo from one of our accountants. During this demo, you'll learn the nuances of our software, and we will learn the nuances of your business. Most importantly, we'll create custom rules around your preferences. Would you like something categorized a certain way? No problem. We'll make sure the software knows that so you never have to worry about it again.

Step 3: Relax + Stay in Touch

After the onboarding process, our software will be able to do most of the work automatically. But don't worry, every business owner is assigned a remote bookkeeper who reviews the work to make sure it's up to your standard.

If you ever have questions or concerns, you can text, email, live chat, or call your bookkeeper anytime to get feedback, advice, or even answers about tax strategy.

bookkeeping software

Is a virtual accountant right for my business?

Since we're in the business of providing online bookkeeping services for small business, we are definitely a little bias. But truth be told, we wouldn't have built a business around this product unless we didn't think it provided tremendous value to entrepreneurs.

In fact, the idea of Bookly came about when our CEO Zach Olson was the humble owner of a skate shop. Olson saw the pains of trying to run a business using traditional accounting solutions (the slow turnaround times, hourly fees for consultations, outdatedness and lack of tech) and decided to do something about that. Whether or not virtual accounting is a good fit for your business, depends on your understanding of the "Bookkeeping Trinity."

The Bookkeeping 'Trinity'

When it comes to bookkeeping frameworks, there are three main options AKA the “Bookkeeping Trinity." Here's how each one works, and what it means for your business.

The 'Traditional' Method

remote bookkeeping companies

The most traditional method of bookkeeping is to hire an accountant or accounting firm. (We’re talking local mom and pop shops and freelancers.) These guys offer great benefits over the DIY self method—like the fact that you’ll barely have to lift a finger and you’ll also be privy to expert insight (pending they’re qualifications of course).

Of course there are also some drawbacks such as higher fees and slow turn around times. Many of these places charge high hourly fees for consultations which can make it difficult to set a steady course for your monthly budget, not to mention their services can often be “behind the times” in terms of integrating technology.

When it comes to the traditional method, business owners will have to consider whether or not they want to hire an in-house bookkeeper or an external accounting firm. Both methods can be expensive with hourly consulting fees and salary/benefit considerations for in-house hires. In-house accountants can be a solid option if you own a large operation and need constant oversight. Smaller businesses however, might find that the costs don’t outweigh the rewards when it comes to hiring a full-time accountant.

The 'Semi-Traditional' Method

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DIY software is an increasingly popular option, giving business owners a great UI to track their finances. Companies like Quickbooks and Xero provide robust software that can help facilitate advanced accounting functions. Not only are many of these types of tools extremely helpful, they can also save money when it comes to hiring a traditional accountant. Although this is a great option for accountants, it may not be optimal for business owners.

Having a good piece of software doesn’t make you knowledgeable about the US tax code, regulations or requirements. Business owners can miss out on deductions, disqualify themselves as a compliant business, and face IRS auditing through improper tax filing. Having simply taken an accounting class in college is no substitute for the wealth of knowledge an accountant brings to the table.

Even if you feel confident enough in your accounting, there is still the consideration of time. Anyone who has started a business knows that they will soon find themselves being pulled in lot’s of different directions. Bookkeeping is a time consuming task—business owners need to ask if reconciling transactions is the best use of their time.

The 'Virtual Accountant' Method

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The third and final option (which no suprise, we’re big proponents of), is software as a service options. This hybrid option has been hailed as "the future of small business accounting" and provides the best of both worlds, giving users access to customized software as well as a dedicated bookkeeper. Instead of having to reconcile your own transactions, a bookkeeper (accountant) will do it for you. Some of these services like Bookly, offer unlimited consultation at no hourly cost. Instead they prefer the more modern “Netflix” model of a monthly flat-rate fee. This gives business owners comfort, knowing the can reach out for advice without fear of incurring extra costs and make more accurate monthly budget predictions.

This option will not be for everyone, for example—extremely large and complicated corporations or accounting firms (just covering our bases). However for the other 90% of business owners—this bookkeeping framework is likely to be the most inclusive and cost effective. It offers all of the good (and more) of the aforementioned methods without the bad. The hybrid mixture of cloud-based tech combined with a human element of a bookkeeper takes away the headache of navigating tax law and entering data—while still providing a high touch high tech solution.

Accounting Systems Technology—The Importance of Computers in Accounting

accounting systems technology

Accounting software systems have revolutionized small business in ways that are still propagating through the industry, transforming it—and themselves as they go.

Accounting and allied fields are still changing rapidly, often in ways we can't easily predict. However, it's clear that new accounting technology has greatly enhanced our abilities to get our work done more efficiently and effectively, a trend that's likely to continue for the foreseeable future. The advent of complex computers, a spate of new and useful programs, and electronic commerce in general has completely changed the way that accountants do business.

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Since we're accounting nerds, we'll cover some pretty hardcore topics dealing with the role of accounting systems technology such as:

  • Accounting uses of the Internet and Intranets
  • Advantages and disadvantages of electronic commerce
  • A comparison of batch and real-time transaction processing
  • Electronic data interchange (EDI) processes

Accounting Uses for Internets and Intranets

Both Intranets and the Internet are extremely useful for accounting purposes, but unfortunately (and inevitably) drawbacks exist that may threaten the integrity of any accounting system. The bellwether issue in this instance is, as it so often is, security. Any electronic system connected to an outside source such as the Internet is prone to attacks from clever hackers, though these days even inexperienced children can attack and effect networks, because the scripts necessary to do so are published on easily-accessed websites.

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These "script-kiddies," whether they truly have malicious intent or are performing the cyberspace equivalent of joyriding, can cause substantial damage to a company's bottom line, especially if they're able to steal, alter, or delete sensitive accounting information. Even worse, corporate spies and disgruntled employees may take advantage of their positions to either steal important information or wreak havoc on a company's systems. Some employees may even hack into sensitive areas not for malicious reasons, but simply because they can. Unfortunately, such intrusions are often hard to detect, because information is easy to copy and so usually does not disappear when it is stolen.

That said, uses such as maintenance and posting of travel expenses, company directories, inventories and price controls, and purchase orders are prime examples of the ways that company Intranets and the Internet can be made to work for the accountant. For example, expense entry and reimbursement can be sped up significantly, with processing costs cut simultaneously. Intranets also allow a company to publish accounting information company-wide all at once, information that they might otherwise have to send out via snail-mail, a substantial consideration for larger companies. Furthermore, in many cases intranets and their associated processes are extremely easy and relatively cheap to institute; they often take advantage of existing e-mail systems, for example, and help to knit together the disparate aspects of the corporation.

While not necessary a direct function of accounting, some payroll functions are easy to relegate to these types of networks, and it's possible to transmit payroll and other accounting information to third-party processors in order to cut payroll and expense checks for the employees. Many companies even maintain servers using programs like Web Cognos that allow employees to examine electronic paycheck stubs, a useful function in companies in which paychecks are electronically deposited and no physical check is ever issued, an increasingly common occurrence.

Advantages and Disadvantages of E-Commerce in Accounting

importance of accounting in business

Many of drawbacks of e-commerce in accounting are essentially the same as those listed in the previous section. The big issue is security; many people don't care to give their credit card numbers and other sensitive information to online vendors -- and for good reason, considering the horror stories of third-party fraud constantly repeated in the media. In addition, creating the framework for e-commerce accounting can be difficult and time consuming. Although a complex database can be simple to use and a great timesaver once it has been created, the company must necessarily go through the process of building that database in the first place, often from scratch. Fortunately, there are a variety of programs, including Microsoft Access, that can streamline this process. Sometimes, too, it's hard to find the individual item one is looking for in a large database; the right questions must be asked in order to elicit the information one needs.

But the advantages are nonetheless vast. E-commerce taps into a fast-growing market that's not merely local or regional, but global as well. Data entered into the forms on a website can be easily downloaded into databases for extended accounting, management, and marketing uses. From an extranet perspective (extranets being expanded intranets allowing some customers and vendors into the system) online bidding and improved supply-chain management allows companies to streamline their processes, which in turn helps to control costs. Installing e-commerce functionality can also help integrate and improve both accounting and management, especially when integrated websites interact with both financial and inventory software.

One interesting way in which accounting and e-commerce could interact involves digital money, which is entirely virtual. Digital money is a direct outgrowth of e-commerce, and if it ever comes into wide use, it will have sweeping effects on the economy. Some of these will be as prosaic as saving on the costs of printing, transporting, and handling paper money, and some will be as impressive as making counterfeiting and money laundering impossible or, at the very least, much more difficult than they already are. Accounting will likely be impacted, though not as much as one might initially suppose. Accountants already juggle large amounts of financial data without ever touching cash, and some of that is already transferred electronically without ever being converted into real cash, although of course the real article must exist in some form to back it.

Batch and Real-Time Processing

application of computers in accounting

The differences between batch and real-time transaction processing are rather straightforward, and are more of degree than of kind. Both, moreover, are valid methods of processing business events such as accounting transaction entries, though they're usually employed in differing circumstances. Generally, batch processing occurs when large numbers of transactions are received in a specific time period, and real-time processing is done in situations where more manageable numbers of transactions are received in that same amount of time.

In some situations, it's advantageous to group transactions into batches for a specific period (usually an hour or day) and process them all at once. This generally uses less computing time, and can be done at night. It's necessary to define certain parameters before the batches are initiated, and in some cases events can be lost or corrupted if the proper care isn't taken. The process also makes it more difficult to catch errors in individual transactions or entries. Batch processing is usually done when there are large numbers of transactions involved, and actual hand-entry as they came in would be prohibitively time-consuming and expensive. Also, it conserves system resources that could better be used for other purposes during business hours.

Real-time processing, on the other hand, involves complete processing as transactions are received. This is advantageous in situations where limited numbers of transactions are received during work hours, since it gets everything taken care of quickly and the use of system resources is negligible. Assuming they are monitored, real-time transactions are potentially less prone to error than batch transactions. The process can also allow a style of in-depth customer service that batch processing does not. Providing real-time processing for all transactions is cost-prohibitive, however, if large numbers of transactions are involved; it's at this point that batch processing comes into its own.

Electronic Data Interchange Processes

Machine Learning

Electronic data interchange (EDI) is a form of electronic commerce used to exchange accounting data between companies or between branches of the same company. EDI can revolutionize the easy exchange of such information, trimming unnecessary redundancy and making the physical exchange of much of the necessary paperwork a thing of the past. Most EDI is batch-related (see the previous section), and uses standardized formats such as ANSI X2 and EDIFACT to transfer a transmission set through networks containing specialized software and hardware. Companies can communicate using methods as disparate as virtual private networks (VPNs), third-party value added networks (VANs), or even the multipurpose internet mail extension (MIME) aspects of existing email systems, which allows transmission across the Internet.

Many wonder about the need for accountants in the future but ultimately instituting EDI is relatively inexpensive, involving the simple automation of an existing process, and in the end can save money by cutting costs.Of course, EDI designers must take security into account in order to safeguard the data, and must include provisions to verify transmission authenticity as well as accuracy and completeness. The electronic trail should be auditable as well.

The Advantages and Disadvantages of ERP

Enterprise Resource Planning (ERP) is another new technological approach to business that has lofty ambitions, many of which it happens to be unable to live up to. The intent is to integrate all of a company's departments and functions (including and especially accounting) onto a single computer system that can handle the entire company's needs. Although the method may be somewhat crude, it's most useful as a method of centralizing and improving customer order processing through the use of a single computer program; Oracle, for example. All the departments can see the customer entries and can update it as necessary. When it works well, ERP provides several useful functions. It can:

  • Integrate financial information;
  • Integrate customer order information;
  • Standardize and speed up manufacturing processes;
  • Reduce inventory; and
  • Standardize HR information

At its best, ERP can help companies streamline their internal processes so that everything runs more smoothly.

These are the ideal results of ERP use. However, ERP systems are often difficult to install, and may never work well. Despite vendor promises, full-blown ERP systems often take several years to work their way into company processes, and may take longer if resistance to change is a significant factor. On the average, process approval and savings do start to appear after an average of eight months. Often, ERP systems require "middleware" or intermediate software in order to integrate with existing programs and systems. In addition, ERP systems tend to be quite expensive to institute and maintain: the total cost of ownership (TCO) includes necessary hardware, software, staff costs, and professional services, and may run into the millions of dollars. Hidden costs (training, customization, testing and integration, data conversion, data analysis, and consultant costs) may also be quite high. In general, ERP seems to be more trouble than it's worth, especially for smaller businesses. 

 

How to Achieve Cap Table Success

If you’ve ever started a business or invested in a business then you probably know the importance of a cap table. As a quick refresher, a company’s cap table is a spreadsheet that shows how the ownership of the company is divided among the founders and investors. Basically, it says who owns what percent of the company.

As a founder, the cap table plays a crucial role in growing your personal wealth. It holds the key to how much you get when it’s time to cash out on the business. Even if you start and grow a business worth millions of dollars, you could receive very little in the end if you don’t manage your cap table well.

Taking care of your cap table and making smart ownership decisions should be just as important to you as building a great company. Here are 3 tips to help you accomplish cap table success.

Start Early

Too often we hear about entrepreneurs that are so excited about starting their business that they forget the importance of organizing their cap table.  Soon enough they have to face the reality. As the company grows, everyone involved begins to shuffle for a piece of the pie.

If ownership hasn’t been worked out beforehand, this can lead to drama and legal issues. As soon as you begin your company, it’s important to start thinking about how to divide ownership fairly. Organize a cap table and record these decisions early on to avoid future headaches and to position your company for long term success.

Record everything

Accurate record keeping is essential for your cap table. The last thing you want on your cap table is an error.

Any error on your cap table will end up costing you, one way or another. From legal fees to incorrect allocation of money, these errors are better just to avoid all together.

You need to track every single transaction on your cap table. And as stated above, make an effort to do this from the very beginning. This might seem obvious, but you’d be surprised at how many cap tables have errors. Sometimes it’s a math error, other times there is information that is inaccurate or simply missing.

Automate

In the past, there were pretty much only two options for managing your cap table. You could either hire expensive lawyers and accountants to do it for you, or you could try to do it yourself.

It may seem easy enough to handle your cap table by yourself. There are definitely some great spreadsheet templates out there to get you started. But even these are very limited.

As your company and cap table mature, it will become too complicated for a spreadsheet. You will need to keep track of option exercises, cancellations, terminations, sales, transfers, and more. Frankly, it becomes messy and time consuming, and there is greater room for costly mistakes.

Luckily, we live in a world of user-friendly business automation software, and that includes cap table management. Now there is handy software with expert support, such as Capshare, to help you keep management of your cap table under your fingertips without being left in the dark.

Conclusion

Your cap table needs to looked after with the same care that you give your growing company. Maintaining a cap table may seem like a daunting challenge, but it doesn’t have to be, due to helpful software. Don’t delay getting started or recording important transactions. Keeping up with your cap table now will lead to less problems down the road and a larger payoff in the end.

Top 10 Write Offs for Independent Contractors (2018)

Write Offs for Independent Contractors

By Austin Miller, founder of The Daily Hash—THE newsletter for foodies 🍔🍦🍜

"Write Offs for Independent Contractors are the Frosting on the Freelancer Cake" says us, right now.

Are you newly in business for yourself as an independent contractor? An independent contractor is defined as a person or business that provides goods or services to another entity under of a verbal agreement or specified contract. Some examples of independent contractors include truck drivers, writers, real estate brokers, and web designers. With the beginning of a new year and the dawn of a brand new tax season, it's important to know what tax deductions you qualify for so you can keep detailed records like receipts and invoices as proof for when it is time to file your itemized deductions.

Deductions for Independent Contractors

The IRS does not correct you should you fail to claim a deduction you are qualified for, so it's in your best interest to be aware of the items you can write off as a cost of doing business. Your deductions should include all necessary and ordinary expenses associated with your work. While there are many tax benefits of being an independent contractor, here are our suggestions as the top 10 write offs for independent contractors in 2018.

1. Occupational Operating Expenses

Tax Benefits of Being an Independent Contractor

The cost of advertising yourself, your services, or your product would fall into this category. Web hosting fees and the cost of internet services are also operating expenses. If you work from home, you can have a shared internet account for both home and business use and deduct a portion of the monthly cost, or you can have a separate business account. The same applies for a phone line. Business cards you have made are another write-off that falls under occupational operating expenses.

2. Supplies and Materials

Tax Deductions: Supplies and Materials

Any items you need to conduct business can be written off. All equipment, including items like a computer, camera, printer, or other office machinery, used on the job is tax deductible. Even the lesser items like paper, pens, and ink are a deduction. It's not commonly known that books, magazines, and newspapers related to your business are also deductible. Even greeting cards sent to clients can be a deduction. Supplies and Materials definitely lands a spot as one of our top write offs for independent contractors.

3. Home Office

Tax Deduction: Home Office

For an office in your home to be considered a qualified deduction, it must be used solely for business. It cannot also be used as a spare bedroom for out of town guests. The way it is deducted is based off its size relative to the rest of the house. For example, if your office takes up 15% of the house, you can deduct 15% of each utility, such as gas and electric, as office expenses. You can also deduct mortgage interest, homeowner's insurance, repairs, and painting. If you rent your home, you may also write off a portion of your rent.

4. Snacks and Coffee

Tax Deduction: Snacks and Coffee

A little known tax write-off often overlooked is the cost of providing yourself and any employees with snacks while working. The cost of caffeine can also be deducted. Meals for you are not included in this category. However, if there is a business reason for having any of your employees eat at work, their meals can be deductions. A good way to take advantage of this tax break is to have a weekly team lunch meeting.

5. Business Entertainment

Tax Deduction: Business Entertainment

While this deduction is only for half the cost of expenses related to entertaining clients, it can be used for business meetings and marketing efforts that take place at restaurants, sporting events, and golf courses. This is a commonly abused deduction, so keep in mind it is always best to consult a professional and follow the strict guidelines given by the IRS.

6. Travel

Tax Deduction: Travel

Travel is another category that is heavily scrutinized, but it is still a great way to keep more of your money come tax time next year. Hotels, air fare, and 50% of meals can be written off for business trips. You can even extend your trip for sheer pleasure as long as the number of days spent on business is longer that the number spent just for pleasure. Local travel is discussed further under car-related expenses. Just keep in mind that travel and deductions related to your vehicle are the items most likely to get you audited by the IRS.

7. Child Care

Tax Deduction: Child Care

You can offer your employees up to $5,000 in dependent-care benefits. If your spouse is your employee, that $5,000 can be used for child care for your own children. These benefits are excluded from wages, so they are deductible for you as the independent contractor. The dependent care benefits are tax free for the employee, even if the employee is your spouse.

8. Cleaning Services 

Tax Deduction: Cleaning Services

Whether you have a home office or rent office space, having it cleaned is deductible. A cleaning company, maid service, or janitor can be used. If you would like to get more creative, you can pay your child to clean. You must be sure to pay them reasonable compensation for the work done. Keep in mind your children can also be paid for data entry, answering the phones, or other business related activities. Children under 18 are exempt from Social Security tax. They also are not subject to federal unemployment tax until they turn 21. The other benefit of hiring your child is that you can make a contribution to an IRA or a Roth IRA for them based on the wages you're paying them. Unless your child has a lot of unearned income, they will not owe income tax on the wages you pay them. This is a great way to lower the family's tax bill by making taxable income of the parent into untaxable income for the child.

9. Car Related Expenses

Tax Deduction: Car Related Expenses

Depending on how much record keeping you like do, this can be a big deduction. Many choose to use the standard mileage rate as it is the easier method, but it is a lower deduction. If instead you use the actual expense method, it requires more individual bookkeeping but it allows for higher deductions. Using this method, you deduct the actual costs incurred each year operating your car for work, plus you use the tax code schedule for depreciation and repairs. Your deductible costs include gas and oil, license fees, repairs and maintenance, insurance, and car wash costs. Whether you use the standard mileage rate or the expense method, tolls and parking can also be deducted. Just keep in mind that transportation write-offs are often audited by the IRS, so keep very detailed records. If the car is also used for personal use, you must keep track of the percentage it is used for business when calculating expenses.

10. Medical Plans 

Tax Deduction: Medical Plans

As an independent contractor, your health insurance is deductible. Other medical expenses, such as acupuncture, chiropractor appointments, eyeglasses, and nonprescription medications not covered by your health plan can also be written off. While being able to write off 100% of your health insurance is great, it can be taken one step further. If you hire your spouse, as was briefly mentioned under the child care deduction, you can provide family health insurance coverage to your employee. Under these circumstances you will be covered on your spouse's insurance plan while further reducing your taxable income.

Write Offs for Independent Contractors: Final Thoughts

There are lots of tax benefits of being an independent contractor, make sure to do your own research when estimating your future tax burden. Proper tax planning with a professional is the safest way to reduce your tax liability while ensuring you comply with applicable tax codes. Also make sure you keep detailed records of any possible write offs. Most importantly, be sure to hire, or, at the very least, consult a tax professional familiar with all laws associated with preparing taxes for independent contractors. While utilizing a tax preparer may seem like an added expense, keep in mind that you can write off what you pay for their assistance on the business portion of your taxes. 

Is Bookkeeping Hard?

Is Bookkeeping Hard?

As a cloud based accounting solution we see people often asking if bookkeeping is hard to learn, what does it involve, and how does it work. Most of those asking these questions are either business owners wondering if they should do their own bookkeeping, or people considering their career options. While we'll try and address both sides of the issue, or focus will be on the business owners point of view.

So...Is Bookkeeping Hard to Learn?

You're not going to like this but the answer is both yes and no. And while this might sound confusing at best, we promise you it will all make sense after you learn what bookkeeping involves. So let's dive right into it...

Industry

Depending on your industry, the expertise and diligence required to maintain your books will vary. This is one reason that the question "Is bookkeeping hard?" is more nuanced than it might appear. 

Time

Given a lot of free time, many (not all) business owners are more than capable of doing their own bookkeeping. But business owners often wear multiple hats and need to perform a list of high level tasks for their business to run properly.

Trying to divide your time between higher level tasks and bookkeeping can create a stressful situation. Often it is the bookkeeping that gets neglected, which brings us to our next point...

Consistency

Keeping books consistently is the key to creating a smooth experience. If you don't have the time, the drive, the mindset or the know-how to stay on top of your books--you will find that bookkeeping is ten times the task it should be. 

Trying to dig through records and transactions from months past is a quick way to transform yourself into an archaeologist, only there will be no exciting temples full of treasure or new dinosaurs to name--only stale transactions.

 Via  Giphy

Via Giphy

Enjoyability

Bookkeeping is not for everyone. In fact, a TD Bank survey which polled over 500 U.S. small business owners, discovered that bookkeeping is their most hated, with the next most hated task falling a whopping 24% behind. Needless to say, you are not alone if you don't enjoy categorizing transactions. And no task (even if simple) is "easy" when you not only don't like doing it, but hate it.

 Via  Giphy

Via Giphy

Longevity

Bookkeeping is repetitive, and a sometimes (okay, a lot of times) mind numbing task. If you are someone who does not have patience or a marathoners attitude, you will quickly find yourself burning out on the task.

Communication

Good bookkeeping requires communication. Chron.com writes:

"Durham Technical Community College reported that the most difficult part of their job was not maintaining financial records, which accounted for 50 percent of their time. It was communicating with colleagues. Bookkeepers must maintain and balance financial records daily, including transactions from coworkers."

Whether you're looking into become a bookkeeper for employment, or your a business owner looking to manage your finances--proper bookkeeping will require you to engage with your employees to better understand the businesses's transaction history.

"But wait, all these things you've written make bookkeeping sound hard!"

That's because we haven't gotten to the crux of the matter just yet. As any good scientist will tell you, theory and practice are two completely different concepts. And while we'd venture to say that in theory many business owners are more than capable of accomplishing their own bookkeeping, in practice many fall short. 

Final Thoughts

Is being a bookkeeper hard?

No. Given the right circumstances and knowledge, bookkeeping can be as simple as categorizing things properly.

Is being a bookkeeper hard?

Yes. For the every so busy small business owner, finding the time and energy to properly maintain your books can be a taxing and arduous task.

 

 

 

Bookkeeping 101: The Ultimate Beginner's Guide to Bookkeeping

bookkeeping 101

Welcome to Bookkeeping 101, where you'll learn Everything you Should Know About Bookkeeping basics (And Then Some)

The term "bookkeeping" might conjure up scenes from a classic gangster flick, with back-alley deals, horse betting, and offers "you can't refuse." But the reality is that this couldn't be farther from the truth. Sure, we have our fair share of excitementan unreconciled transaction or an uncategorized charge (we kid, we kid). Bookkeeping is an arduous and time consuming process, a marathon that begins the day you open for business, to the day you (hopefully never) close your doors. 

The purpose of this article is to give business owners a full overview of what bookkeeping entails so that they can:

A. Implement proper bookkeeping practices

B. Decide which bookkeeping methodology to use (yes, there's more than one way to keep your books...) 

C. Decide if it's something you really can and should do. 

Since there is a lot of information contained on this page, we recommend you bookmark this page and refer to it often. 

bookkeeping basics

What is Bookkeeping?

Bookkeeping is simply keeping tabs on all of your financial transactions pertaining to business expenses. Or for the real nerds out there (and don't worry, that includes most of us here in the office), here's the Wikipedia answer:

Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business. Transactions include purchases, sales, receipts, and payments by an individual person or an organization/corporation. There are several standard methods of bookkeeping, such as the single-entry bookkeeping system and the double-entry bookkeeping system, but, while they may be thought of as "real" bookkeeping, any process that involves the recording of financial transactions is a bookkeeping process.

WHAT IS THE IMPORTANCE OF BOOKKEEPING?

Whether you own a niche pop culture news site or a multi-billion dollar car companyyou need to implement proper bookkeeping techniques. 

How you go about doing your books is up to you, but even if you don't use a 3rd party bookkeeping service you must keep solid records of business transactions.

If you don't, not only could you lose out on thousands of dollars in potential deductionsyou could also lose compliance with the IRS. If the latter happens, not only will you not be eligible for deductions, you might end up owing the IRS money. 

What are Good Bookkeeping Practices?

Rather than list a million things you should be doing, we will list some of the most common bookkeeping pitfalls and how you can avoid them, starting with unreconciled transactions.

Unreconciled transactions

Do you have unreconciled transactions on your books? Your books cannot be complete until all transactions that occurred in 2015 are categorized correctly. Solution? Think and act chronologically.

Loan payments

Do you have loan payments on your books? You may not have accounted for the principle and interest portions of the payments correctly. If you have categorized the whole payment to a single expense, your books are probably incorrect. Make sure you always account for the principle, as well as interest.

The infamous “shoe box” 

Simply put, if your receipts are sitting in a box somewhere, then you haven’t even begun to keep your books. There is really no way to reconcile this pitfall except for to suggest that business owners abandon this practice and implement correct accounting principles from the beginning. Trust us when we say, it’s a lot easier to start documenting your transactions from the start, than to go through a year of coffee stained receipts to try and categorize transactions you may or may not remember. 

Inventory count

Your books may have inaccurate values for inventory and Cost of Goods. This can be due to a miscount or, just as common, theft. This is especially important for business owners who have a physical product. Always stay current on inventory, and December 31 is always a good date to do a proper inventory check. This is a crucial step as you aim to properly keep your books. 

Payroll

Like a bicycle wheel, you’re payroll needs truing. Such maintenance requires that your income statement show payroll at gross but without a manual adjustment to the standard bank feeds, this account is probably only shown at net payroll. 

Accrual basis bookkeeping

There are numerous accounts that need to be manually updated at year-end. This task is often far too difficult if you do not have an accounting background. It’s best to discuss this process with a CPA or accountant. 

Should I do my Own Bookkeeping?

bookkeeping 101 funny

The question of whether or not you should do your own bookkeeping really comes down to a couple of things.

Time:

Bookkeeping is an extremely time consuming and tedious task. If you are in the early stages, you are most likely stretching yourself as it is--perhaps trying to manage your marketing, sales, PR, customer service, and inventory all at the same time. As a startup, we understand the "hustle" mentality. 

Expertise:  

Does your accounting experience boil down to a couple of college courses? Have you ever taken the time to get to the state and federal tax codes that apply to you? Are you familiar with the term "nexus"? 

Many business owners think they have what it takes to do their own books, and they very well might. But chances are, most business owners overestimate their "expertise" when it comes to proper accounting. 

Side note: On a philosophical level, you also need to ask yourself, what makes you happiest. Why did you start your business? Was it to categorize transactions, or was it to fulfill a need, explore your passions, share your gifts, better a product, or change the world?  

Chances are that you didn't become a business owner so you could practice bookkeeping. Hiring a bookkeeper will allow you to focus on the real reason you decided to put blood and tears into your product. 

What are the Different Bookkeeping Services Available?

bookkeeping 101 small business

The O.G. or “Traditional” Bookkeeping Services: Accounting Firms

The most traditional method of bookkeeping is to hire an accountant or accounting firm. (We’re talking local mom and pop shops and freelancers.) These guys offer great benefits over the DIY self method—like the fact that you’ll barely have to lift a finger and you’ll also be privy to expert insight (pending their qualifications of course).

Of course there are also some drawbacks with these bookkeeping services, such as higher fees and slow turn around times. Many of these institutions charge high hourly fees for consultations which can make it difficult to set a steady course for your monthly budget, not to mention their services can often be “behind the times” in terms of integrating technology. 

When it comes to the traditional method, business owners will have to consider whether or not they want to hire an in-house bookkeeper or an external accounting firm. Both methods can be expensive with hourly consulting fees and salary/benefit considerations for in-house hires. In-house accountants can be a solid option if you own a large operation and need constant oversight. Smaller businesses however, might find that the costs don’t outweigh the rewards when it comes to hiring a full-time accountant. 

accounting 101

The "Semi-Traditional” Bookkeeping Service: DIY Software

DIY software is an increasingly popular option, giving business owners a great UI to track their finances. Companies like Quickbooks provide robust software that can help facilitate advanced accounting functions. Not only are many of these types of tools extremely helpful, they can also save money when it comes to hiring a traditional accountant. Although this is a great option for accountants, it may not be optimal for business owners.

Having a good piece of software doesn’t make you knowledgeable about the US tax code, regulations or requirements. Business owners can miss out on deductions, disqualify themselves as a compliant business, and face IRS auditing through improper tax filing. Having simply taken an accounting class in college is no substitute for the wealth of knowledge an accountant brings to the table. 

Even if you feel confident enough in your accounting, there is still the consideration of time. Anyone who has started a business knows that they will soon find themselves being pulled in lot’s of different directions. Bookkeeping is a time consuming task—business owners need to ask if reconciling transactions is the best use of their time. A more honest labeling of "DIY" software is not a bookkeeping service, rather a bookkeeping tool.

online accounting

The "Fully Automated” Bookkeeping Service: Software+Human Touch

The third and final option which we will most definitely compare to a puppy being wrapped in a blanket—are software as a service options. This hybrid service provides the best of both worlds, giving users access to customized software as well as a dedicated bookkeeper. Instead of having to reconcile your own transactions, a bookkeeper (accountant) will do it for you. Some of these services like Bookly, offer unlimited consultation at no hourly cost. Instead they prefer the more modern “Netflix” model of a monthly flat-rate fee. This gives business owners comfort, knowing the can reach out for advice without fear of incurring extra costs and make more accurate monthly budget predictions. Rather than a mean (tool) to an end, this option is a completely automated solution. 

This option will not be for everyone, for example—extremely large and complicated corporations or accounting firms (just covering our bases). However for the other 90% of business owners—this type of bookkeeping service  is likely to be the most inclusive and cost effective. It offers all of the good (and more) of the aforementioned methods without the bad. The hybrid mixture of cloud-based tech combined with a human element of a bookkeeper takes away the headache of navigating tax law and entering data—while still providing a high touch high tech solution to your bookkeeping service needs.  

Before clicking the X on your browser, or the button below, remember to ask yourself two things: "Do I have the expertise to make the most of my tax returns?" and "Are my talents best spent doing my own bookkeeping?" If you find yourself unsure on either of these fronts—click the button below and we'll give you a no-hassle consultation where you can ask any questions you might have and even get a free month trial of our services. 

 

 

300+ Deductions to Help you Chuck Norris Your Small Business Taxes

tax deductions

If man's best friend is dog, thAn business owner's best friends Are tax deductions.  

As a cloud-based accounting solution, we see the sad tale of business owners during tax season who wish they could go back in time and implement the things they didn't know. Don't be one of them—BOOKMARK THIS PAGE RIGHT NOW and check it once a year, a month, a week—whatever the hell you have to do to make sure you're doing everything you can to maximize deductions. Because if there's one thing all business owners can agree on, it's that capital is the lifeblood of business. So here they are, 300+ tax deductions that will make 2017 your best year yet. 

Auditing and Accounting Deductions

Coffee on a desk

1. Auditing of your books and accounts

2. Costs of bookkeeping

3. Costs of tax strategy preparation

4. Costs of preparing & filing any tax returns

5. Costs of investigation of any tax returns

6. Costs of defense against any IRS or state agency audits or challenges

7. Accounts receivable, write-offs (accrual basis only)

 

Advertising + Sales Deductions

New York Times Square

8. Achievement awards (requires plan) 

9. Longevity award

10. Safety award

11. Sales award

12. Advances made to employees or salespeople where repayment is not expected

13. Advances to employees canceled as bonus 

14. Ad analytics

15. Premiums given away

16. Newspaper

17. Magazine

18. Radio

19. Other media

20. Prizes & other expenses in holding contests or exhibitions

21. Contributions to various organizations for advertising purposes

22. Cost of displays, posters, etc. to attract customers

23. Publicity - generally speaking, all costs incl. entertainment, music, etc.

24. Christmas present to customers or prospects - de minims rule

25. Alterations to business property, if minor

26. Amortization

27. Attorney's fees and other legal expenses involving:

28. Tax strategy

29. Drafting of agreements, resolutions, minutes, etc.

30. Defense of claims against you

31. Collection actions taken against others

32. Any other business - related legal activity

 

Auto Expenses for Business Purpose Deductions

volkswagon van

33. Damage to auto not covered by insurance

34. Gasoline

35. Oil

36. Repairs and maintenance

37. Washing and waxing

38. Garage rent

39. Interest portion of payments 

40. Insurance premiums such as fire, theft, collision, liability, etc.

41. Lease payment

42. License plate

43. Driver's license fee

44. Depreciation

45. Wages of chauffeur

46. Bad debts. – if previously taken into income

47. Baseball/softball/ soccer team equipment for business

48. Board & room to employee:

49. All meals and lodging if for employer’s benefit

50. Temporary housing assignment

51. Board meetings

52. Bonuses as additional compensation to employees.

 

Building Expenses Used for Business Deductions

Painting the wall

53. Repairs to building

54. Janitorial service

55. Painting

56. Interest on mortgage

57. Taxes on property

58. Water

59. Rubbish removal

60. Depreciation on building

61. Heating

62. Lighting

63. Landscaping

64. Burglary losses not covered by insurance

65. Business cost of operating office

66. Business property abandonment

67. Business taxes - except federal income taxes

68. Cable service – business use

69. Cafeteria plan - requires written plan

70. Capital asset sale - losses

71. Car & taxi fares

 

Casualty Damage Deductions

demolition building

72. Bombardment

73. Fire

74. Storm

75. Hurricane

76. Drought Forest fire

77. Freezing of property

78. Impairment or collapse of property Ice

79. Heat

80. Wind

81. Rain

82. Charitable contributions

83. Checking account bank charges

84. Child care - requires written plan

85. Children's salaries

86. Collections expenses incl. attorney's fees

87. Commissions on sales of securities by dealers in securities

88. Commissions paid to agents

89. Commissions paid to employees for business purposes

 

Contribution Deductions (Deductible if Made to Organizations Founded for the Following Purposes, Subject to Some Limitations)

University Campus

90. Religious-Charitable

91. Scientific

92. Literary

93. Educational

94. Prevention of cruelty to children and animals

95. Convention expenses, cost of attending conventions

96. Cost of goods

97. Credit report costs

98. Day care facility

99. Depletion

100. Depreciation

101. Discounts allowed to customers

Dues Paid Tax Deductions

tax deductions

102. Better Business Bureau

103. Chamber of Commerce

104. Trade associations

105. Professional societies

106. Technical societies

107. Protective services association

 108. Education assistance – requires written

109. Embezzlement loss not covered by insurance

 

Employee Welfare Expense Deductions

birthday cupcakes

110. Dances

111. Entertainment

112. Outings

113.  Christmas parties

114. Shows or plays

115. Endorser's loss

116. Entertainment expenses

117. Equipment, minor replacements

118. Equipment purchases - may require capitalization & depreciation

119. Equipment repairs

120. Exhibits and displays, to publicize your products

 

Expenses of any Kind Charged to Business Deductions

suit and tie

121. Renting of storage space

122. Safe deposit boxes

123. Upkeep of property

124. Books to record income and expenses or investment income

125. Experimental and research expenses

126. Factoring

127. Fan mail expenses

 128. Fees for passports necessary while traveling on business

129. Fees to accountants

130. Fees to agents

131. Fees to brokers

132. Fees to investment counsel

133. Fees to professionals for services rendered

134. Fees to technicians

135. Fire loss

136. Forfeited stock

137. Freight charges

138. Gifts to customers – limit $75

 

Gifts to Organized Institutions Deductions

iglesia capilla

139. Religious

140. Charitable

141. Scientific

142. Literary

143. Educational

144. Group term insurance on employees' lives

145. Guarantors loss

146. Health insurance

147. Heating expense

148. Hospitals, contributions to

149. Improvements, provided they are minor Insurance premiums paid

 

Interest on Loans for Business Deductions

Wallstreet Man in Suit

150. On loans

151. On notes

152. On mortgages

153. On bonds

154. On tax deficiencies

155. On installment payments of auto, furniture, etc.

156. On margin account with brokers

157. Bank discount on note is deductible as interest

158. Inventory loss due to damages

159. Investment counsel fees

160. Lawsuit expenses

161. Legal costs

162. In defense of your business

163. In settlement of cases

164. Payment of damages

165. Lighting

166. Living quarter furnished employee for business’s benefit

167. Lobbying costs

 

Loss Deductions (Deductible if Connected With Your Business or Profession) 

Japanese Restaraunt

168. Abandoned property

169. Account receivable

170. Auto damage caused by fire, theft, heat, storm, etc.

171. Bad debts.

172. Bank closed

173. Bonds

174. Building - damaged

175. Burglary

176. Business ventures Capital assets

177. Damages to property or assets

178. Deposit forfeiture, on purchase of property

179. Drought

180. Embezzlements

181. Equipment abandoned

182. Forced sale or exchange

183. Foreclosures

184. Forfeitures

185. Freezing

186. Goodwill

187. Loans not collectible

188. Theft

189. Transactions entered into for profits

190. Maintenance of business property

191. Maintenance of office, store, warehouse, showroom, etc.

192. Maintenance of rented premises

193. Management costs

194. Materials

195. Meals, subject to limitations

196. Membership dues

197. Merchandise

198. Messenger services

199. Moving costs

200. Musician expenses

201. Net operating loss - may be carried back to previous years' income for refund and / or forward against future years’ income

202. Newspapers

203. Office expenses, including:

204. Wages

205. Supplies

206. Heating and lighting

207. Internet service

208. Telephone

209. Repairs

210. Refurnishing, minor items

211. Decorating

212. Painting

213. Office rent

214. Office rent - portion of home used for business

215. Passport fees

216. Pension plans - must be properly drawn

217. Periodicals

218. Physical fitness center

219. Plotting of land for sale

220. Postage

221. Professional society dues

222. Property depreciation

223. Property maintenance

 224. Property repairs

225. Publicity expenses

Real Estate Expenses of Rental or Investment Property Deductions

Real Estate

226. Taxes of property

227. Insurance

228. Janitorial services

229. Repairing

230. Redecorating

231. Painting

232. Depreciation

233. Supplies

234. Tools

235. Legal expenses involving leases, tenants, or property

236. Bookkeeping

237. Property management

238. Utilities

239. Commissions to secure tenants

240. Maintenance - heating, lighting, etc.

241. Advertising for tenants

242. Cost of manager's unit, if on site and at employer's convenience

243. Rebates on sales

244. Refunds on sales

245. Rent settlement – cancel lease

 

Rental Property Expense Deductions

san fransisco homes

246. Advertising of vacant premises

247. Commissions to secure tenants

248. Billboards & signs

249. Rent collection expense

250. Business property

251. Parking facilities

252. Safe deposit boxes

253. Taxes paid by tenant for landlord

254. Warehouse and storage charges

 

Business Property Repair Deductions

construction site

 

255. Alterations, provided they are not capital additions

256. Casualty damages, replaced, provided they are not capital additions

257. Cleaning

258. Minor improvements

259. Painting

260. Redecorating

261. Repairing of furniture, fixtures, equipment, machinery, and buildings

262. Roof repairs

263. Royalties

264. Safe deposit box rental

265. Safe or storage rental

266. Salaries

267. Sample room

268. Satellite service – business use

 

Selling Expense Deductions

business meeting

 

270. Commissions and bonuses

271. Discounts

272. Entertainment

273. Prizes offered in contests

274. Publicity and promotional costs

275. Rebates

276, Services, professional or other necessary

277. Social Security taxes paid by employers

278. Software

279. Stationery and all other office supplies used

280. Subscriptions to all trade, business, or professional periodicals

281. Supplies, office or laboratory

282. City gross receipts tax

283. City sales tax

284. State gross receipts tax

285. State sales tax

286. State unemployment insurance tax

287. Federal Social Security tax

288. State income tax

289. State unincorporated business tax

290. Real estate tax

291. Tangible property tax Intangible property tax

292. Custom, import, or tariff tax

293. License tax

294. Any business tax, as a rule

295. Auto registration tax

296. Safe deposit tax

297. Membership dues tax

298. Gasoline tax

299. Admission tax

300. Telephone

301. Traveling expenses (includes: meals, taxi fare, rail fare, airfare, tips, telephone, telegrams, laundry and cleaning, entertainment for business purposes)

302. Unemployment compensation taxes paid by employer

303. Uniforms furnished to employees

304. Wages

305. Website hosting expenses

306. Workmen's compensation fund contributions

 

Disclaimer: This is not an all inclusive list. None of these statements are meant to be taken as guarantees for your tax returns. The IRS is its own institution with its own discretions and powers of interpretation. This information is not intended to provide specific accounting advice tailored to your unique situation, or to address specific tax strategies. Please consult with your tax advisor to supplement and verify what would be best for your circumstances. 

 

 

 

 

 

The Science Behind Payroll Taxes

Payroll

If you’ve ever looked at your W2, you’ve probably noticed the boxes on the right that record the taxes withheld from your wages.  After you spend a few moments daydreaming about what you could have done with that extra cash, you may wonder how those amounts are calculated.  Is there even a calculation?  Or are those amounts just arbitrary numbers the IRS generates to further baffle taxpayers?  

Of course, for as much as we’d like to take a cynical view of the IRS, there is in fact a science behind the numbers. By better understanding payroll taxes, you'll be able to better understand your obligations as a business owner or employee. We will start with the 3 main withholding taxes. (A withholding tax is what you as a business owner is obliged to withhold from employees and pay to the IRS.)

The 3 Main Withholding taxes 

  • Federal Income Tax withheld
  • Social Security Tax withheld
  • Medicare Tax withheld

(The last two of these make up what’s known as the FICA withholding amounts.) 

Federal Income Tax

When an employee is first hired, many companies require them to fill out a W4. The W4 asks for things like filing status, dependents, child care expenses, additional taxes. The information taken from the W4 is what impacts your W2 federal income tax calculation; which is more like an estimation. Just like businesses are supposed to make estimated tax payments throughout the year, employees pay their estimated income taxes through their W2 income tax withholdings.  It’s not exact because the true income tax withholding amount is only set in stone when the tax return is finished and submitted.  It’s possible your W2  income tax withholding was too low throughout the year, meaning you’d owe taxes. Or maybe it was too high, meaning you’d get a refund. You can always adjust this amount by contacting your payroll specialist.  

FICA Taxes

FICA stands for Federal Insurance contributions Act.  It includes the taxes paid by both employees and employers toward Social Security and Medicare which provide benefits to the disabled, retirees, old-age, disability insurance among other groups and health programs.  15.3% is the number to remember regarding FICA tax.  Below you’ll see how that percentage is broken down.  

Social Security Tax Withheld  

6.2% of an employee's gross wages is paid to social security by the employee.  Another 6.2% is paid to social security by the employer.  Together, they make up a 12.4% contribution to social security.  The employers obligation to pay this portion of the tax ends when the employee earns total wages of more than $118,500 annually.  

Medicare Tax Withheld

Similar to social security, payments to Medicare are split up between the employee and the employer.  1.45% is paid by the employee and 1.45% is paid by the employer.  Together this makes up 2.9%.  There is no ceiling on this tax.  Regardless how much an employee earns, Medicare will always be separated.  

Adding the 12.4% so social security and the 2.9% to medicare equals the magic number 15.3% FICA tax mentioned earlier.  

Next time you look at your W2, you’ll be able to use these percentages to see just how the amounts were calculated.  

Payroll Taxes relating to Contractors and Employees

Knowing the payroll calculations can help you understand other important issues relating to 1099 contractors or W2 employees.  If you have paid a non-employee more than $600 to perform work for you, then you must send him/her a 1099 that will be used as documentation for the contractor’s tax return.  You get to deduct this entire payment on your taxes and you don’t need to share the FICA obligation.  The contractor is fully responsible to pay the 12.4% Social security and the 2.9% Medicare.  From a tax perspective, it is more beneficial for the employer to hire contracted work to avoid extra FICA taxes.  However, there are strict guidelines that enforce the designation of employee or subcontractor which you can view here.  

How Business Credit Can Affect Your Business

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Like your personal credit, your business has its own credit scores too—scores that can help (or hurt) you in a number of ways. Thus, it’s best to know what they are and how they can affect you.

How can business credit help me?

A good business credit score can help you secure better interest rates on loans, decrease instances where you need to prepay for a specific product or service, and secure better trade terms with important suppliers in your industry.

Let’s say you’re looking to start a hair salon. You plan on purchasing salon equipment, such as expensive styling chairs and supply trolleys. In addition, you’ll need to keep consistent inventory of hair products. How do you plan to buy all this equipment and inventory?

Maybe you have money saved up or generous friends and family that are willing to help out. In the likely case that that doesn’t cover all your expenses, keep in mind that lenders and suppliers need a means of determining how well your business repays debts before they will approve you for financing or favorable payment terms. This is where business credit scores come in. A lender can check your business credit report and/or pull your business credit scores to see how likely you are to make on time payments.

Whether it’s equipment and inventory for a hair salon, construction materials for a home repair company, medical supplies for your office, etc., startup costs, expansion costs, and general running-your-business costs can add up to much more than expected. Having good business credit scores can be your best bet for securing financing options you can afford, or simply keeping your business afloat when the costs pile up or cash flow fluctuates.

What is a business credit score?

Just like personal credit, there are a few big credit reporting agencies collecting information about your business credit. Each agency can have different information on file for the same business, which means they are creating a different business credit report and calculating a different score for your business. Three of the most notable business credit scores are:

Dun and Bradstreet PAYDEX Score, used by suppliers and vendors to determine your payment terms. Scores range from 1 to 100, higher scores indicating better payment performance.

The Intelliscore Plus℠ from Experian, used by lenders to determine the likelihood of delinquency over the next 12 months. Again, scores range from 1 to 100.

FICO® LiquidCredit® Small Business Scoring Service℠, used by the SBA to pre-screen applications for commercial loans under $350,000. Scores range from 0 to 300, where the minimum score to pass the SBA’s pre-qualification is currently 140.

Top tips to improve your business credit scores

It’s tough to add another thing to the list of what you need to take care of as a business owner. Fortunately, taking care of your business credit is similar to taking care of your personal credit. Here are a few things you can do now to keep your business credit reports and scores in check:

Pay bills on time. Pay early if you can! To score a 100/100 on your PAYDEX score, you’ll have to consistently pay early.

Open multiple credit accounts, such as a business credit card, a line of credit, or loan. Use only your business accounts for your business expenses to ensure that you keep your business and personal finances separate, and try to keep your balances under 25% of the available credit line.

Maintain good relationships with your suppliers and vendors, and check to see if they report to business credit reporting agencies so that your positive payment history is being reflected in your business credit report.

Check your reports for errors or derogatory remarks. 25% of small business owners have reported significant errors on their business credit reports. If you find an error, be sure to request a correction from the reporting agency.

 

Gerri Detweiler is Head of Market Education for Nav, which provides business owners with simple tools to build strong business credit. Her articles have been widely syndicated, and she writes a column for Money.com. She is also the coauthor of Finance Your Own Business: Get on the Financing Fast Track.

Please note that Bookly’s sponsorship of this blog article is not intended to address the specific circumstances of any particular individual or entity and does not constitute an endorsement of any entity or its products or services. This content represents the views of the author, and does not necessarily represent the views or professional advice of Bookly.

Why Do We Pay Taxes?

reasons why we pay taxes

A Brief Overview of the American Tax System

We all pay them and we all dread them—but how many of us really understand why we have to pay taxes? 

Article 1 Section 8 of the United States Constitution states, “The Congress shall have the Power to lay and collect Taxes, Duties, Imposts and Excises to pay the Debts and provide for the common Defense and general Welfare of the United States.” 

What falls under the definition of “general welfare” has been hotly debated. Republicans and Democrats often disagree as to why we pay taxes, and what taxes should be used for. Even the constitutionality of taxes has been in dispute.

The IRS counters this on their website, stating, “There have always been individuals who argue taxes are illegal. They use false, misleading, or unorthodox tax advice to gain followers. The courts have repeatedly rejected their arguments as frivolous and routinely impose penalties for raising such frivolous arguments."

"Why do we pay taxes?”—A Timeline.

  • Originally the US government relied upon internal taxes on certain items (similar to the VAT in Europe). The cost of the War of 1812 required a federal sales tax on certain luxury items. But all internal taxes were dropped in 1817 in favor of tariffs on imports to support the federal government. 
  • The first federal income tax came about in 1862 in order to fund the Civil War. Along with it came the inheritance tax. And although all citizens have to file their federal taxes—not all states require them. 
  • The inheritance tax was later removed (1872) and a few years later the Supreme Court declared income tax unconstitutional. However, in 1913 the 13th amendment was passed, making the income taxes both permanent and legal. 
  • Since then rates have gone up and down several times since 1913. The highest raters ever were in 1945 at 94% That’s 94 cents of every dollar! (The lowest rate that same year was 23%.) 

"Why do we pay taxes?”—A Philosophy. 

There are some who would argue that Filing Form 1040 violates the Fifth Amendment which states:

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury, except in cases arising in the land or naval forces, or in the militia, when in actual service in time of war or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

To which the IRS responds, “The courts have consistently held that disclosure of the type of routine financial information required on a tax return does not incriminate an individual or violate the right to privacy. Also, courts have consistently found that the First and Thirteenth Amendments do not provide rights to refuse to comply with federal tax laws."

Originally the Federal Government was created with the idea of serving the singular purpose of protecting the rights of the people. With a complex international community that has to consider such things like nuclear warfare, cyber attacks, terrorism, viruses and other such threats—you'd be be hard pressed to find many that would find disagreement with the necessity of taxes to this end. However, the real dispute occurs when government uses taxes to pay for things that ride the line (or fall outside) of protecting our rights. Healthcare, social services, education to name a few—all end up on the debate ticket come election season. 

The dividing point to many of these questions comes down to one thing—philosophy. Do you believe that government should account for more than is seen as “essential” to protect our rights? And if you don’t, what do you believe falls under the definition of “essential” or “constitutional rights”? 

 Adam Smith

Adam Smith

Whoever said philosophy has no effect on the real world, is sorely mistaken. Adam Smith (who is thought to be one of the forefathers of the American Tax System) studied social philosophy at the University of Glasgow and Oxford. His infamous book “The Wealth of Nations” is the work that introduced the concept of the “Invisible Hand”. The Invisible Hand is a philosophical concept that the whole (nation) unintentionally benefits from the self-interest of the individual (the citizen). This and his other famous dictum “The Four Maxims” have *big suprise*—also been hotly debated topics in regards to intent. 

The Four Maxims are as follows: 

Equity: The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.
Certainty: The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.
Convenience: Every tax ought to be levied at the time, or in the manner in which it is most likely to be convenient for the contributor to pay it.
Economy: Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the publick treasure of the state.

“Why do we pay taxes?”—Schools of thought.

When it comes to the ethics of taxation there are three main approaches that underly American ideology and help us understand why we pay taxes". They are as follows:

Utilitarianism, which tells us to aim for the greatest total happiness across the population. In the economic sphere, we can interpret ‘happiness’ as the satisfaction of our desires; and so utilitarianism as aiming for maximum satisfaction of desires.
Deontology, which bases ethics on the idea of duty.
Virtue ethics, which focus on the virtues we should have, and on what constitutes a virtuous life. A broad conception of the virtues must be used here, encompassing not only virtues such as honesty, but also virtues such as using one’s talents and leading a fulfilled life.

Conclusion:

As the world becomes increasingly dangerous, the need for funds to “protect” the rights of the constitution will become increasingly complex. Simply put, there will be few who argue against the necessity of modern taxation. However, there are a plethora of verticals for which our income is used that do not clearly fall under the definition of "necessary".

This point of cataclysmic divide boils down to a matter of perspective. It’s this very ambiguity that politicians use to their advantage when it comes time to head to the voting booth. The answer to “why we pay taxes” is rather simple—in order to survive as a nation. But the answer to “What should ethically be funded with tax money?” and “How much should we pay?” are entirely different questions that boil down to philosophy, perspective, and an understanding of the US constitution.  

Tax Evasion vs. Tax Avoidance

tax evasion

In the world of finances, tax evasion and tax avoidance are two terms that often get confused and yet have completely different meanings. 

Tax Evasion

Simply put, the term tax evasion means not paying the taxes that you owe. Penalties for this type of infraction can range anywhere from fines to jail time depending on intent. Intentionally foregoing the payment of your taxes will most likely result in hefty punishment.

Don’t believe us? Go read about actor Wesley Snipes' recent 3 year stint in prison after opting out of paying his taxes. 

Important things to remember when trying  to “Avoid” Tax Evasion

  • Declare your independent contractor’s income
  • Don’t inflate business expenses
  • Report income earned in other countries
  • Don’t declare personal expenses as business expenses

Tax Avoidance

Tax avoidance on the other hand, is when you arrange your income in a manner that legally allows you to pay the lowest amount of taxes. And yes, this is legal. In fact, there’s an entire industry built around this concept—it’s called tax consultancy—something we love helping clients with here at Bookly

Speaking on the constitutionality of the matter, Judge Learned Hand said:

Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands. 

In most cases, tax avoidance is more applicable to higher income earners. There are less ways for low income individuals to avoid payment of taxes. This fact has been at the helm of much political debate—something we’ll leave to the pundits. 

Methods of Tax Avoidance

  • Deferring income (401k)
  • Getting income through Capital Gains
  • Using the primary residence capital gain exclusion to its full effect

A 1 Minute Introduction to Roth IRA Contributions

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You can’t learn all there is to know about Roth IRA’s in one minute, but after reading this article you should have a good understanding of the fundamentals. 

What’s a Roth IRA?

The IRS defines a Roth IRA or Roth Individual Retirement Arrangement as a “…tax-favored account or annuity set up in the United States solely for the benefit of you or your beneficiaries.” In human language, a Roth IRA is essentially savings account intended for retirement that provides you tax benefits. 

How Does a Roth IRA Benefit me?

  • Partial or full deductions for IRA contributions.
  • The possibility of tax reductions or untaxed deposits.
  • Typically no taxation until withdrawal. 

Things to Consider:

  • There are differences between a Roth IRA and Traditional (Simple) IRA.
  • There are limitations for who can obtain a Roth IRA depending on factors such as income  such as: $129,000 for single earner or $191,000 for married filing jointly.
  • There are strict limitations for what’s considered “compensation.”  

 

For a more detailed account, visit the IRS website for a detailed account of Contributions to Individual Retirement Arrangements.